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.
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.
Your credit score also could change when you refinance student loans because it may lower the age of your credit accounts. This credit score factor measures the average age of your open accounts. In general, having a higher average age is better. Opening a new loan and closing longstanding ones at the same time can reduce this average age. Having accounts with a positive history open for a long time can positively affect your credit score. Even though your average age may be lower after refinancing, your new loan will likely be open for a long time. As you build a history of on-time payments over the life of your new loan, your score can bounce back.
If your score changed a lot, it’s worth looking at other areas of your credit report as well. Did other information in your credit report change around the time you refinanced your student loans? There are many reasons why a score can fluctuate, but a changing score means changing information. Check all your accounts, including revolving accounts like credit cards, to see if there are any updates that may have made your score drop. A higher reported credit card balance or missed payment can potentially lead to a sharp score decrease. Any time is the right time to review your credit report. Use this as an opportunity check your financial history and make sure your report information is accurate and up-to-date.
It can be frustrating to see a drop in your credit score when you make a smart financial decision. If you make a change to one area of your finances, it may affect another. But remember: your credit score is just one piece of your overall financial health. That you’re making the effort to actively engage and take control of your credit health makes it more likely you’ll reach your financial goals over time.