Trying to qualify for student loan refinancing can feel like a cruel cycle.
You’re likely pursuing a refinance in order to save money on your student loans—the same loans that may be sabotaging your finances and rendering you ineligible for a student loan refinance. If you’ve been struggling to make your payments, it’s likely that your credit score has suffered as a result.
So how low can your credit score be while still allowing you to qualify for student loan refinancing?
While you can qualify for a mortgage or credit card with a 600 credit score, you likely won’t be eligible to refinance your student loans. According to Forbes Advisor’s analysis of the Best Student Loan Refinance Lenders, the most common minimum credit score among lenders that disclosed their requirements was 670 or 680. The lowest minimum was 650 at lenders including SoFi and Earnest.
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If your score falls below this threshold, there are things you can do to improve your chances of getting a student loan refinance. Read on to learn about your options.
How to Improve Your Credit Score
There are several ways you can increase your score to become a better refinance applicant.
1. Pay on Time
The most important factor in a credit score is your on-time payment history, which counts for 35% of your credit score. Paying your bills on or before the due date every month will improve your score over time. If you accidentally miss a payment, pay it as soon as possible. Lenders typically won’t report payments that are less than 30 days late.
2. Be Careful How Much Credit You Use
The second biggest factor is your credit utilization ratio, or the percentage of your credit card’s total credit limit you’re using. The credit utilization ratio applies both to individual cards and to the aggregate figure among all your credit cards.
Credit card providers don’t show your utilization ratio on your statement, but it’s easy to calculate. Look at the current balance on your credit card and divide it by the total credit limit. For example, if the current balance is $1,500 and the total credit limit is $5,000, then your credit utilization ratio is 30%.
The ideal credit utilization ratio is 10% or less, so if your percentage is above that, try to work on paying down the balance. You also can call the credit card provider and ask them to increase your credit limit, which is an easy way to reduce your utilization ratio.
3. Don’t Apply for New Credit
If you want to improve your credit score, you should also avoid opening new accounts. Each new account will decrease your credit history’s average age, which makes up 15% of your credit score. Also, every time you apply for a new loan or credit card, it will count as a hard inquiry on your credit report. This can reduce your score temporarily.
If you have a significant negative event on your credit report, like a bankruptcy or a loan that went to collections, all you can do is wait. Most negative items fall off your credit report after seven to 10 years.
Fortunately, the impact of those events on your credit score will be minimized over time. For example, a bankruptcy from five years ago affects your credit score much less than a bankruptcy from last year.
Make sure not to apply for a refinance until your score is closer to 675 or more, because the credit score you see online at your bank or numerous sites that offer scores for free may not be the exact same credit score the lender sees. There are dozens of iterations of credit scores, so if one source says your credit score is 650, the number that the lender sees may be 645.
Get a Co-Signer
Some lenders will approve a borrower with less-than-stellar credit if they have a co-signer with a good credit score. A co-signer is someone who commits to taking over payments if you default on the loan.
A co-signer doesn’t have to be a direct relative or spouse; it can be anyone you know. The only stipulation is that they need a good credit score and stable income. If you choose a co-signer with a poor credit profile, you won’t be approved for the loan.
Asking someone to co-sign on a loan is no small favor. It will affect their credit score, and the loan will show up on their credit report until you pay it off. This can make it harder for them to qualify for their own loans.
Alternatives to Student Loan Refinancing
If your credit score isn’t high enough to refinance, you have other options to save money on your student loan repayment.
Sign Up for Automatic Payments
If you don’t qualify to refinance your student loans, you can still save on interest. Both private and federal student loan providers offer a small interest rate discount if you sign up for automatic payments. The discount is usually 0.25%, but may depend on the specific lender.
Visit your lender’s website or contact their customer service department to enroll in this service. Another benefit of signing up for automatic payments is that you won’t have to worry about due dates and late payments.
Use Home Equity
If you’re a homeowner, you can tap the equity in your house and use that to pay off your student loans. You need at least 20% equity in the home to qualify.
The two main options for this strategy are a home equity loan and a home equity line of credit (HELOC). Interest rates on HELOCs and home equity loans are relatively low, and both of these loans are easier to qualify for than a student loan refinance.
The downside for both options is that your house becomes collateral on the loan. If you default on the home equity loan or HELOC, the bank can foreclose and seize your house.
A cash-out refinance is another option if you have more than 20% equity in your home. This involves refinancing your mortgage to a new loan and receiving a check from the lender for any equity beyond 20%. You then end up with a larger mortgage than you had before cashing out.
Lower Your Monthly Payment
If you have federal student loans, you may be able to sign up for an income-driven repayment plan (IDR). Choosing one of these plans will likely lower your monthly payment, which can ease your cash flow concerns.
For example, if you have a credit card balance with a high interest rate, reducing your student loan payment could let you throw more money toward your credit cards. This may end up saving you more money in total interest.
Bring Student Loans Out of Default
If you defaulted on federal student loans, you can bring them out of default with a rehabilitation process. You’ll have to make nine consecutive payments, after which time the default will be removed from your credit report. You could also sign up to consolidate your student loans, which will get them out of default faster but won’t eliminate the default from your credit report.
Borrowers with private student loans must contact their lenders directly to see what their options are.