Refinancing your student loans can help you get a lower interest rate, which may save you thousands in interest payments. With most lenders, you’ll need a minimum FICO score of around 660 to be eligible to refinance. The higher your score, the better rates you’ll be able to get. So what happens if your credit score isn’t high enough?
You’re not alone. Many people who come to CommonBond are just 20-40 points shy of the minimum score. Even though they can’t refinance right away, they’re often able to work on their score and come back to refinance within a year or less. It’s never too late to take control of your student loans. No matter where you’re starting, here are some steps you can take to improve your credit score:
1. Check your current credit score
Your credit score helps lenders evaluate your ability to pay back loans, based on your borrowing history. This website offers a list of places to check your FICO score for free, without impacting your credit score. You can also check your Vantage credit score at places like creditkarma.com to get an approximate sense of your FICO score.
Tip: Keep in mind that different companies use slightly different criteria to calculate your credit score. For example, your FICO score may be slightly lower than your Vantage score. In general, any steps you take to improve will help across all your scores.
2. Fix any errors on your credit report
Related to your credit score, your credit report includes an overview of your loans and payment history, past addresses, and bankruptcies. Errors are relatively common, so finding and fixing them can help you boost your credit score. You can get free copies of your credit reports from Equifax, Experian, and Transunion every twelve months from annualcreditreport.com, without impacting your credit score. The Federal Trade Commission has instructions for how to report an error.
3. Set up automatic payments
Your payment history makes up around 35% of your credit score, so making sure you’re meeting at least the minimum payment amount on all your accounts, on time, is key. To keep things simple, you may want to call your lenders to group your various payment due dates together. Pick a date that’s shortly after you receive your regular paycheck, so you know your bills are taken care of.
4. Improve your credit utilization
Your credit utilization is another major factor in your credit score. It takes into account how much of your available credit you’re using at any given time. For example, if you have two credit cards that have a credit limit of $5,000 each, your available credit is $10,000. If you had balance of $4,000 between the two cards, your credit utilization would be 40%.
Ideally, you want your credit utilization to be under 25% (and even lower if possible). If you’re struggling with credit card debt, you may want to try these strategies:
- Try to avoid making any new purchases with your credit cards. Use a debit card or cash instead.
- Make sure you’re paying your minimum balances each month (set up autopay!). Ideally, you want to get to the point where you carry no balance on your cards from month to month.
- Put any extra money you can towards paying off each card in full, starting with the highest interest rate card.
If you already able to pay your balances in full each month, keep it up! Your goal is still to keep your utilization percentage low. One way to do this is to apply for a credit line increase with your credit card company. For example, if you increased your credit limit from $5,000 per card to $10,000 per card, the same $2,000 monthly balance would now be at a 20% utilization.
Note: In most cases you can request a credit line increase as often as every six months, without impacting your credit score. You should confirm this with your credit card company.
Credit bureaus check your credit utilization every 30 days or so, so if you know you are applying for a loan or refinance in the near future, you may want to pay down your credit card balance twice a month to keep your utilization percentage as low as possible. However, if you are trying to build up a payment history, make sure to wait until you’ve received your monthly credit card statement before you pay off your balance, or else credit bureaus may assume you have no payment activity at all.
5. Inventory your accounts (and keep your oldest one open)
Lenders want to see that you have a long credit history, so try to avoid closing your oldest account. They also like to see a variety of accounts, as long as you’re paying them on time and keeping your utilization low. Both closing old accounts and opening new ones can negatively impact your score by around 5-10 points for at least a few months, so try not to open or close a lot of accounts all at once. However, don’t let the prospect of a temporary ding prevent you from closing high-fee accounts or opening new lines of credit (as long as you can pay them responsibly).
6. Consider your timing
Opening a new line of credit (including applying for an auto loan, credit card, mortgage, or student loan) requires a “hard” credit check, which can impact your score by about 5-10 points for several months. (If you’re shopping around and do several hard checks within a 30-day period, you’ll only impacted once). In the grand scheme of things, that's not a big deal. But if you’re about to apply for any kind of loan, be thoughtful about your timing. Similarly, be especially mindful of your credit utilization while you’re in the midst of applying for a loan. Even if you pay off your balance in full each month, a high temporarily balance (such as from booking a vacation) could increase your utilization percentage and lower your credit score.
You can’t change your credit score overnight, but it is possible to make significant progress in a year or less. The best part is that refinancing with CommonBond is free, so whenever your score improves significantly, you may be able to refinance again for an even lower interest rate.