Reasons You Should Refinance Your Student Loans
Are you tired of paying hundreds, if not thousands of dollars per month for student loans? Do you feel like you aren’t making any progress? The chances are, you probably aren’t. Student loans can cripple your finances and have a long-lasting impact on your life. The interest from student loans alone can cost hundreds per year, making it extremely difficult to get ahead.
Consider refinancing your loans to get a lower interest rate or lengthen the life of your loan if you are currently strapped for cash. With rates on the decline, there’s no better time to consider a refinance. Keep reading to learn the top reasons you should consider refinancing.
Your Interest Rate is Too High
One of the biggest reasons you should consider refinancing your student loans is if your interest rate is too high. Because interest rates are partially determined by market conditions, it’s possible you could qualify for a lower interest rate saving you hundreds per year in interest alone.
Student loan interest rates are determined by several factors. Your credit score, market conditions, and your credit history all determine your interest rate. In the past year, interest rates have been declining, giving you a chance to take advantage. You can check current market interest rates here!
Your Credit Score Has Increased
Like we mentioned above, your credit score is a large factor that determines your student loan interest rate. If your credit score goes up, you can qualify for a lower interest rate, and therefore pay less interest.
You can check your credit through many different facets. Many credit card issuers offer a credit service that allows you to check your credit score for free, and without a hard inquiry. If you do not have a credit card with that service, you can check out websites like Credit Karma or Mint.
Ways you can increase your credit score
Your credit score is meant to be a gauge of your creditworthiness based on your history of making payments on time, keeping accounts open long enough, and not utilizing all of your available credit.
In order to increase your credit score, you’ll need to make your credit payments on time and keep your overall credit utilization down. We’ve included a list of the best ways to increase your credit score below.
Make Payments on Time
Making payments on time is the most important piece of your credit history. It shows creditors that they can expect you to pay them on time and in full for the money that you have spent. Even as little as six months of on-time payments can have a profound impact on your credit score.
Keep Your Overall Credit Utilization Low
Just because your credit limit is $10,000 doesn’t mean you should use all $10,000 of it. In fact, if you keep your credit utilization high, your credit score will take a hit. Try keeping your credit utilization below 30% to keep your credit score in check.
Keep Accounts Open
Keeping your accounts open for extended periods of time will have a positive impact on your score. This shows that you are a trusted borrower amount creditors. If you have many accounts opened in a short time period, creditors might be scared that you are going into deep debt. Keep your accounts open for longer than 4 years to have a positive impact on your credit score.
Have Multiple Accounts
The more accounts you have, typically the better. Keep in mind that you should never open many accounts in a short time period as it will have a negative overall impact on your score. Having multiple accounts proves to creditors that multiple sources believe you are creditworthy.
Keep Hard Inquiries to a Minimum
Every time you apply for a line of credit, the creditor will pull your credit history in the form of a hard inquiry to determine if you should be approved and to what amount. These can have a negative impact on your score if you have too many in a short time period. Hard inquiries will disappear from your credit after two years, so be sure to space them out if possible. 2-4 hard inquiries are considered acceptable, with more than 6 having a negative impact on your score.
Try Experian Boost
If you’re new to credit, it might seem impossible to get your first line. You are in the predicament of not having a high enough credit score to get a line of credit, but also not having any credit to improve your score. So what do you do? Well, a new tool called Experian Boost allows you to use things like utility and cellular phone payments to prove your creditworthiness. It can raise your score overnight and while it may not be a 200 point increase, it could be just enough to get your first line of credit.
You’re Ready to Make a Large Lump Sum Payment
Making a large payment at once on your student loans can help you to get a lower interest rate by lowering the total amount you owe. By consolidating your student loans into one payment with a lower interest rate you can save big time.
You Started a New Job or Received a Raise
Did you recently start a new job or get an increase in pay? Congratulations! Maybe it’s time to consider refinancing your student loans. Your increase of income could allow you to lower the length of your loans which can save you thousands over the life of the loan.
You Need Cash
While we do not recommend this reason at all, some people chose to refinance their student loans to get a lower payment. This will cause the total amount of interest you end up paying to increase exponentially.
There are some cases when this could be a smart option, however. For individuals that have large debts in other sources, credit card debt, for example, it might make sense to refinance your student loans in order to pay a larger amount to your debts with higher interest rates (namely credit cards or personal loans).
There are many good reasons to consider refinancing your student loans. And with student loan debt reaching all-time highs and interest rates on the decline, there’s no better time to consider it. If your credit score has increased or you’ve just accepted a new job with an increase in pay, you should consider refinancing your student loans.