Refinancing student loans is an excellent way to reduce the monthly interest rate on student debt. Lowering interest rates can reduce the total cost of the loan and potentially free up extra cash each month.
Unfortunately, getting approved for a student loan refinance can be difficult for the borrowers who need it the most. The two most important numbers in the approval process are the debt-to-income ratio and credit score. Today we will discuss the lowest FICO credit score that some lenders accept as well as some tactics to turn a rejection into an acceptance.
The Lowest Credit Score Accepted by Student Loan Refinance Companies
We reached out to several lenders to inquire about the minimum credit score that they would approve. For many student loan refinance companies, the approval formula is a closely guarded secret and constantly evolving. Fortunately, three lenders did share some fairly detailed information about the lowest credit score they would approve.
|Lender||Average Score||Lowest Credit Score Approved||Lowest Credit Score with Cosigner|
Even though not all lenders are included, the above table should be reasonably representative of what most lenders expect.
While the average credit score approved can seem like a pretty scary number, the minimum credit scores necessary should be attainable for most consumers.
According to FICO.com, approximately 40% of consumers have credit scores in the 750 to 850 range. Another 30% of consumers fall into the range from 650 to 749. Even though 650 is a lower credit score than most lenders will accept, it is very close to being in the approval range. That means nearly 70% of consumers have credit scores that should meet the minimum requirements for student loan refinancing.
Don’t Be Intimidated by Average Credit Scores of Approved Borrowers
21% of consumers have FICO scores above 800. Reaching such a high level usually requires an understanding of the credit scoring system and taking the steps necessary to maximize one’s score. These high credit consumers are also the ones who are most likely to be aware of the savings from finding low-interest rate student loan refinancing. Borrowers in this category will drive the average credit scores up.
As more borrowers become aware of the potential savings that refinancing offers, we’d expect the average credit scores of approved borrowers to drop.
Credit Score Factors and Improving Your Score
If you do fall under the minimum acceptable to refinance, the good news is that it is possible to improve your score substantially in just a few months.
According to the credit reporting agency Experian, five main factors go into your credit score:
- Payment History – Payment history counts for 35% of your total score. The good news for student loan borrowers with some missed payments is that recent history is far more critical than ancient history. Missing a payment last month will do far more damage than a missed payment that is two years old.
- Credit Utilization – Credit Utilization counts for 30% of your credit score. Credit Utilization compares your credit card debt to the amount of credit available. Generally, keeping credit utilization below 30% is ideal. If you have a $5,000 credit card limit, try to keep the balance below $1,500. The lower you keep your balance, the better the credit score.
- Length of Credit History – Consumers don’t have much of an ability to fix this factor. Not much can be done to make your oldest credit line even older. However, it is important that if your oldest credit line is a credit card that you do not cancel the account. Fortunately, the length of credit history only counts for about 15% of your credit score.
- Types of Credit Used – The type of credit used will be 10% of your credit score. In this category, variety is a good thing. You don’t want to have exclusively retail credit cards.
- New Credit – A bunch of hard inquiries can hurt your credit score, as this factor accounts for 10% of your credit score. Those interested in refinancing should be aware of the benefit of shopping around on scoring models. One application can cause a dip in your score, but if you check your rates with several other companies in the same timeframe, it will not hurt your score any further. This allows consumers to shop interest rates without negative consequences.
If you are not happy with your current credit score, myFico has several tips that can be used to improve your credit score.
Credit Scores are Not the Only Factor
We have also seen some borrowers with excellent credit scores rejected on their student loan refinance applications. This is because the debt-to-income ratio is an incredibly important factor in the approval process. If minimum payments on credit cards, student loans, mortgage, and auto debt consume most of your paycheck, this may be the factor causing the rejection.
Borrowers who are right around the minimum acceptable credit scores are far more likely to be approved if they have excellent debt-to-income ratios. A raise at work could be the difference between an approval and a denial.
We should also point out that rejection due to low credit score may not be the worst thing. Federal student loans come with many significant borrower protections such as income-driven repayment plans and student loan forgiveness. Refinancing with a private company means these perks go away. For those struggling with their federal debt, keeping the loans with the federal government is often the best option.
The best strategy for getting approval will vary from borrower to borrower. Those worried about a low credit score getting in the way would be wise to apply with many different student loan refinance companies when they attempt the process. If things don’t go well, spend several months focusing on fixing your credit score, and improving your debt-to-income ratio. Once you have made some improvements, start the application process again. Meeting the minimum credit score required isn’t the only step that needs to be taken, but it can be a huge step forward.