Does a Student Loan Consolidation Help Your Credit Score?

Save

A student loan consolidation involves combining multiple education loans into one with a single monthly payment. Your credit profile will show the new loan as a current debt and the others as paid in full. According to Equifax, one of the three major credit bureaus, student loan consolidation can hurt your credit score slightly in the short-term but help it over the long-term.

Credit Score Basics

  • A credit score breaks down into five categories. While percentages may vary slightly depending on the scoring model a credit bureau uses, each category contributes a specific percentage to your overall credit score. For example, in a FICO credit score, your overall payment history counts for 35 percent. Total amounts owed compared to available credit counts for 30 percent, average account age contributes 15 percent and both the number of new credit accounts and your credit mix each count for 10 percent.

Short-Term Effects

  • A loan consolidation triggers a hard pull on your credit score because it indicates you are applying for a new account. According to MyFICO, a hard pull may cause a small drop in your overall score. Additionally, the new account can decrease the average account age, which can also cause a short-term credit score drop. A consolidation doesn’t affect total debt compared to available credit since the principal loan amount doesn't change.

Long-Term Effects

  • Consolidating multiple student loans into one decreases the number of open credit accounts. Even though you have the same debt load, having fewer open accounts will improve your credit score. In addition, consolidation usually lowers your monthly payment, which in turn makes paying on time easier. That can only help the payment history part of your score.

Consolidating Private and Federal Loans

  • According to Michael Lux, an attorney and founder of the Student Loan Sherpa, consolidating private and federal student loans into one loan is unwise, especially if you already have a low credit score. For one thing, you’ll need to consolidate through a private lender, which means you’ll lose federal student loan benefits such as income-based payments or the opportunity to apply for a forbearance. Unlike a federal loan consolidation, the private lender's terms will depend on your credit score. You may not only pay more in interest over the life of the loan, but may also not realize much of a monthly payment reduction.

References

Promoted By Zergnet

Comments

Related Searches

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!