Student loans don't necessarily hurt your credit—in fact, they can even help.
But what happens when you consolidate a student loan? Having good credit is crucial to so many aspects of your financial life—everything from buying a house or car to landing a job. It's smart to know how refinancing will look to creditors before you make the move.
It’s important to note here that while we’re using the word “consolidate” to refer to replacing several different loans with a single loan from a private lender, the actual word for this is refinancing.
Consolidation technically refers to replacing only your federal loans with a single Direct Consolidation Loan through the federal government—a different process than refinancing. Most people use the two terms interchangeably.
Now that we’ve got that out of the way, here’s an overview of the issues to consider when it comes to refinancing and your credit.
Will consolidating student loans hurt my credit?
Probably not. In fact, there are a lot of reasons it could give your credit score a boost.
There’s one way the process of applying for refinancing could ding your credit, though—and it involves a number of different lenders taking a look at your score.
Let’s say you’ve decided you want to refinance, but you’re not sure which lender to go with. So you apply with several different lenders to see which one gives you the best rate (a smart move). Each lender has to take a look at your credit score to decide what interest rate to offer.
The issue is that, depending on the type of credit pull the lender does, that check could show up on your score. And, fair or not, a lot of those checks can make you look risky to lenders--even though you're just shopping around.
However, this can be a non-issue. There are two different types of pulls financial institutions do to get a look at your credit score—a hard and a soft pull. A hard pull can indeed ding your credit—but a soft pull won’t.
What’s the difference between a hard and soft pull?
A hard pull happens when a lender checks your credit score to make a final lending decision. These stay on your credit report for about two years, and they can slightly lower your score—especially if you have quite a few of them.
When you shop around for lenders to refinance your loan, they’ll typically do a soft pull to make an initial offer—and that won’t affect your credit. A lot of lenders will disclose the type of pull they’ll do during the application process. If they don't, ask.
Once you’ve agreed to their initial offer, they’ll do a hard pull. You’ll get that one pull on your credit, but you won’t get one from every lending company you apply to—only the one you decide to go with. A single hard pull isn’t likely to hurt your credit.
You can minimize the impact of multiple hard pulls on your credit by limiting your shopping around to about 15 days. If all the inquiries are clustered together, the credit bureaus will assume that you're doing some comparison shopping.
Will my credit score increase after student loan consolidation?
We’ve written before about how student loans can actually help your credit. But they can hurt if you get behind on your payments. If you do that—or go into default—your credit will tank.
Refinancing can land you a reduced interest rate, which will decrease the amount you pay on a monthly basis—or reduce the amount you pay over the life of the loan. That means you’ll have an easier time paying back your loan. A record of steady repayment on your student loans will look good on your credit.
In addition, refinancing reduces the number of loans you have open—and that also looks good on your credit, even if you have the same amount of debt in total at the end of the process.
Refinancing can definitely have a positive impact on your credit score—and it’s worth looking into. Check out Refi Ready to see how much you could save.