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Credit Card Debt and Student Loan Refinance Applications

Small tweaks to your credit card habits can make a huge difference when you apply to refinance your student loans.

Written By: Michael P. Lux, Esq.

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When the time comes to apply for student loan refinancing, most of the factors that affect your application are out of your control. You can’t just erase your debt, and your salary is your salary. These numbers do not change very easily.

Credit cards are a little different. With just a little bit of effort, most people can tweak their credit card situation so that it helps their refinance efforts.

One of our readers had this question in mind when he wrote the following:

I am interested in refinancing my student loans, but I heard that it would be in my best interest as far as interest rates go to reduce the available credit I have on my credit cards. Is this true? How does this work?


Jeff is right and wrong. The available credit does make a difference in your application, but reducing it will only make things worse.

Understanding Debt-to-Income

There are a number of different factors that go into any credit approval or rejection decision.

Along with your credit score, one of the most important factors is your monthly debt-to-income ratio.

The debt-to-income ratio is how lenders determine your ability to pay. The more income you have each month, or the less debt you have, the better this number gets. If your monthly debt bills are low compared to your monthly income, your odds of approval are much better.

Credit Cards and Debt-to-Income

Whether you carry a balance or pay off your credit card in full each month, your credit card affects your debt-to-income ratio.

The key number with the credit card is the minimum amount due. This is the number that the computers will use when they do the math on your debt-to-income ratio.

Even if you are paying your credit card balance in full each month, you will note that there is still a minimum payment. You might also notice that as your balance gets lower, the minimum due gets lower. Keeping that number as low as possible will help your cause.

Credit Cards and your Credit Score

You may be thinking that if you just cancel your credit card, the minimum payment becomes zero.

While this is true, doing so will likely hurt your credit score, so it is best not to cancel the card. When lenders look at your credit report, having a credit card, paying your bills each month, and keeping the balance low will help your credit score greatly.

Another factor that goes into your credit score, as noted by Jeff, is your available credit. Lenders what to see a lot of available credit. This shows that you can resist the impulse to just max out your credit cards.

Most credit experts suggest that you use no more than 30% of your available credit, while others say that below 10% is best. The key number is the monthly statement. Even if you use the credit card well above the 30% available credit, if you pay off the debt before the credit card company issues the statement, it will show a very low balance and a high available credit.

This move will help your application numbers. If you have been with your credit card company a while, you might also consider calling to ask them to raise your limit (just make sure they don’t need to do a credit pull in order to do so). Even if you don’t ever plan on using the extra available credit, having it will help your credit score.

Your Timeline

One other thing to keep in mind is that the student loan refinance lenders do not have direct contact with your credit card companies. They get this information from the credit agencies.

The credit agencies get monthly updates from your credit card companies. That means that knocking down your credit card balance will not help you if you apply to refinance tomorrow.

You have to give the companies involved time to update the necessary information. The best practice would be to keep balances low for at least a couple of months. Going this route assures you that the numbers reported are good ones.

The Bottom Line

Getting your credit cards in order before you apply to refinance can really help your application odds of success.

The key is keeping your balance low and available credit high. Do this, and you give yourself the best chances at approval.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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