Enter the $2,000 Nitro Scholarship now! Apply in 3 Minutes!

2 Ways Refinancing Student Loans Can Help Your Credit Score

You've heard about all the practical reasons for refinancing your student loans: It can lower your monthly payment, lower your interest rate, and even help you pay off your debt sooner. 

But how does refinancing affect your credit score? 

progress-421387-edited

Does refinancing your student loans hurt your credit score?

First, let's dispel with the negatives. There's only one, and it's small. Your credit will take a tiny hit initially due to credit inquiries — though you can minimize the impact if you limit your shopping around to 15 days.

The net effect of refinancing your student loans is generally positive. That's because it helps improve your financial health in general. But let's get more specific. 

A lower monthly payment leads to a better debt-to-income ratio

Many student loan borrowers struggle with too-large monthly payments in proportion to their income. In other words, you may not have a lot of money left over after your bills and living expenses.

Borrowers in these situations have what's known as high debt-to-income ratio — when too much of your monthly income is going toward your debt obligations.

This isn't good for your financial health. Along with credit scores, lenders look to debt-to-income ratio to determine how risky it would be to lend to a borrower. A high debt-to-income ratio is a signal to lenders that you could have trouble making monthly payments. They may not choose to lend to you at all, or if they do, you could end up with a high interest rate.

If your student loans are contributing to a high debt-to-income ratio, refinancing can help. By lowering your monthly payment, you can lower your ratio and increase your credit worthiness.

Because your credit score is based on your payment history, along with other factors, having a more manageable monthly payment will make it easier for you to make on-time payments, thereby improving your score.

Imagine Life Without a Student Loan Payment... Start Saving Now!

Paying off your loan faster will reduce your overall amount of debt

Many people refinance in order to pay off their student loan debt faster. Through refinancing, you may be able to get a lower interest rate. Over the long term, a lower interest rate will save you money and it will help you pay off your debt faster. 

That's because monthly loan payments are applied in a very specific order:

  1. Any late fees you've incurred
  2. The interest you owe
  3. The principal loan balance

To pay off your debt, you need to eliminate the principal loan balance. Lowering your interest rate means more of your monthly loan payment goes toward your principal loan balance.

Ultimately, paying off your debt quicker can lead to a better credit score because you've shown that you have a history of making consistent payments toward your debt obligations. This shows your credit worthiness. 

You might be thinking, but can't refinancing hurt your score, considering that you're taking on a new debt obligation? Not really. Because student loans are considered secured debt, they don't negatively impact your credit score the same way revolving or unsecured debt, like many credit cards, does. Secured debt is viewed more favorably by lenders; in fact, this kind of debt is often used as a way for people to build up their credit. 

In other words, running up your credit cards to make or pay off your student loan payments will hurt your credit. But refinancing? It can actually help.

See also: The 7 Biggest Misconceptions About Student Loan Refinancing

Additional Nitro Recommended Student Loan Lenders

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  

Sallie Mae

3.37% - 13.72%1 Variable & Fixed
10 - 15 years

Undergrad Students Learn More

View Disclosure

Ascent

3.04% - 14.75%1 Variable & Fixed
5 - 15 years

4

Undergrad & Graduate Students Learn More

View Disclosure

Earnest

2.70% - 12.78%1 Variable & Fixed
5 - 15 years

3

Undergrad & Graduate Student & Parent Learn More

View Disclosure

SoFi

2.99% - 13.60%1 Variable & Fixed
5 - 15 years

Undergrad & Graduate Student & Parent Learn More

View Disclosure

FundingU

6.99% - 12.99%1 Variable & Fixed
10 years

Undergraduate No-Cosigner Student Loan Learn More

View Disclosure

MPowerFinancing

7.52% - 14.98%1 Fixed
10 year only

Undergrad & Graduate Student Learn More

View Disclosure

Rates (APR) 3.37% - 13.72%1
Loan Types Variable & Fixed
Terms 10 - 15 years

Eligible Degrees Undergrad
Eligible Degrees Students
Rates (APR) 3.04% - 14.75%1
Loan Types Variable & Fixed
Terms 5 - 15 years

4

Eligible Degrees Undergrad & Graduate
Eligible Degrees Students
Rates (APR) 2.70% - 12.78%1
Loan Types Variable & Fixed
Terms 5 - 15 years

3

Eligible Degrees Undergrad & Graduate
Eligible Degrees Student & Parent
Rates (APR) 2.99% - 13.60%1
Loan Types Variable & Fixed
Terms 5 - 15 years

Eligible Degrees Undergrad & Graduate
Eligible Degrees Student & Parent
Rates (APR) 6.99% - 12.99%1
Loan Types Variable & Fixed
Terms 10 years

Eligible Degrees Undergraduate
Eligible Degrees No-Cosigner Student Loan
Rates (APR) 7.52% - 14.98%1
Loan Types Fixed
Terms 10 year only

Eligible Degrees Undergrad & Graduate
Eligible Degrees Student

About the author