You want to apply for a refinanced student loan, but, you are afraid you will be denied due to a low credit score. If you recently graduated from college and haven’t had time to establish a credit history or damaged your score from a series of missed payments a few years ago, you might be nervous about your current score. Here’s what you need to know about the ideal credit score for student loan refinancing.
What is a Credit Score?
A credit score is a three-digit number ranging from 300 to 850. The higher the score, the better your interest rate, as you have demonstrated that you have wisely used your credit in the past and are more likely to use it wisely in the future than those that have missed payments or have never been issued a loan or credit card to establish a credit history.
An “Excellent” Score Means the Lowest Rates
As with any other type of loan, whether it’s for a car or house, the applicants with the highest credit scores tend to qualify for the lowest interest rates. This also holds true for private student loans. While lenders will not usually state the credit score range required to qualify for a particular interest rate, you can usually assume you need a score of around 750 to receive the lowest interest rate for your repayment term.
Having “excellent” credit (a score of 750 or higher) is attained by demonstrating a consistent history of on-time payments, a low debt-to-credit utilization ratio, and not constantly applying for new types of credit. It can also take several years to slowly build your score to this level.
A Score of 650 is also Accepted by Most Lenders
Not everybody has perfect credit. People accidentally forget to pay the credit card bill one month & that single incident remains on their report for 7 years and can also drop their score up to 100 points depending on their previous credit history. This is why lenders offer a range of interest rates.
As long as your score is still above 650, many lenders will consider you to have “prime” credit. This means you are still highly likely to make the monthly payment, but, you will be assigned a higher interest rate than if you had a score of 800.
For example, your interest rate might be 6.29% instead of 2.365% by having a less-than-ideal credit score and can mean paying an extra $15 in interest each month on a 5-year loan with a $10,000 balance.
Even if you are assigned the highest interest rate, it is still better than not qualifying for private student loan refinancing at all. This is because a credit score less than 650 is often considered “subprime” and will disqualify you from most private lenders because you are too risky.
Can I Still Apply for Private Student Loan Refinancing With a Low Credit Score?
If your own score is lower than 750, it is possible to still get the lowest interest rate. You simply need to apply with a cosigner that has a better credit score than your own score. They are liable for making the monthly payment if you miss it, and, their credit score can be damaged as well as your score if a payment is missed.
If your cosigner is hesitant to help you, many lenders will allow you to release your cosigner in a few years once your own score has improved and you can qualify for the same interest rate without them. Until then, be sure to tell them thank you for helping you qualify for the lowest interest rate.
Apply for Federal Consolidation
If the cosigner route isn’t an option, an alternative is to apply for a federal consolidation loan. These loans are administered by the U.S. Department of Education, the same agency that issued your regular federal loans, and they do not use a credit score during the application process.
Advantages of a Federal Consolidation Loan
A federal consolidation loan has two primary benefits. First, it extends your repayment term up to 30 years just like private refinancing. Secondly, you get to keep your federal loan benefits like income-based repayment plans & loan forgiveness options that you forfeit when using a private lender.
Disadvantages of a Federal Consolidation Loan
There are also some downsides to a federal consolidation loan, including your interest rate will be the average of your existing federal interest rates. With private refinancing, you have the opportunity to qualify for a lower interest rate.
Another downside is that you cannot bundle your federal and private loans together because your private loans have fewer repayment benefits. This means if your credit score is currently too low to qualify for private refinancing, you will have to continue making the current monthly payment or wait until your score improves.
Private lenders are fairly generous with credit scores and refinancing as any score above 650 generally means you will get approved. Plan on having a score of at least 750 to get the best rates. Or, see if a cosigner with excellent credit will help you refinance.