Refinancing your student loans can be a smart move. It can help you get better terms, like a lower interest rate, so you pay less interest over the life of the loan. Less interest and a single monthly payment can make your student loans more affordable and easier to manage. While refinancing is usually a solid money move, it can have a temporary negative impact on your credit score. If you recently refinanced your student loans and saw a drop in your score, there may be a couple of reasons why.
You credit report likely shows a new hard inquiry
When you refinance student loans, you’re not making changes to the terms of your current loans—you’re actually creating a brand new loan. The new loan pays off the balances of your old loans. To refinance your student loans, you’ll have to submit an application to a lender. The lender will then pull your credit report to decide if you qualify for the new loan. This is known as a hard inquiry, and one can lower your credit score. This may be why your score dropped when you refinanced your student loans.
Everyone’s score reacts differently to credit activity, so the impact of one or more hard inquiries will vary. If you rate-shopped for your refinancing by applying to multiple lenders, your credit report may show several hard inquiries. If you plan to rate shop for your student loans or any future loan, try to complete all your applications in a short time period (ideally, two weeks). This can help limit how many hard inquiries appear on your credit report.