Does Consolidating Student Loans Affect Credit Score?
How Does Consolidating Student Loans Impact Credit Scores?
Having to make payments on many student loans in one month may be somewhat taxing. Consolidating student debts might appear like a decent way to pay back debt and assist in eliminating the need to pay various loans. But before you visit for debt consolidation, you should be precisely sure how it will impact your credit. This is what you need to know about how consolidation of your student loans affects your credit score.
Consolidating two or more student loans simply means grouping two or more of an individual's debts into one bigger loan.
Consolidating many federal student loans into one loan helps the borrower to simplify matters. It is not relevant to private student loans. The result is that instead of the many payments one would usually make, there is only one paid each month. Depending on the sum, student loan consolidation also lets you stretch your payback term to up to thirty years. Although this is a longer term that can enable you to make lesser monthly payments, over time the interest will cost more.
Does Consolidating Student Loans Harm Your Credit Rating?
However, you should know that the process of consolidating federal student loans does not negatively affect your credit scores. Federal student loan consolidation doesn’t show up as a separate account on your credit reports. Therefore, the actual consolidation process will not affect your credit scores at all. Nevertheless, there are some roundabout means by which student loan consolidation might prove detrimental to your credit in the future.
Closing Old Accounts When you consolidate loans, your current federal student loans are paid off. Hence, such trade lines will be reported and closed on your credit reports. Pay off your revolving credit accounts, your credit scores will drop if you have many newly opened loans or cards. Less weight will be attached to accounts that are more than 10 years old when they are closed. Furthermore, mortgage loans student loans, and auto loans, are not as burdensome as credit cards. Therefore, consolidation does not have a major impact on the average age of accounts unless you have very old federal student loans with long credit history.
Higher Credit Utilization Credit utilization is calculated by dividing your balances by limits and represents 30 percent of FICO Scores. Student loan consolidation is not a tool that affects the student loans one has; it only combines loans. However, it can enhance the proportion of credit that you are using since everything is grouped under that new consolidated loan. An increase in the credit utilization rate has a negative impact and will reduce credit scores mostly for a short period. It declines as you continue to decrease your consolidated balance by paying off your credit card debts.
Single Monthly Payment It can help you avoid making a few payments and forgetting about some loans that you need to make payments on. If you have been maintaining good credit, it is important to stay updated with all your federal student loans. Even falling behind on one federal loan leads to severe impacts on credit scores and creditworthiness. Consolidation is beneficial in terms of maintaining sound financial status and creditworthiness in the long term.
Resetting the Clock If you are repaying the balance on your federal student loans by consolidating them, the repayment term can be as long as 30 years. Choosing such a repayment period means that you are starting ‘from scratch’ as the clock is reset. Rather than paying loans more aggressively than the initially agreed terms. This ensures that outstanding student loan balances continue to drag down credit scores for many more years. These concerns imply that the longer the loans stay on as outstanding balances, the more the credit health is likely to be affected negatively.
Interest Savings The potential of federal student loan consolidation is often associated with the possibility of accessing lower interest rates. When combined, the interest rates of existing federal loans are calculated as a weighted average and then rounded down to the nearest 1/8 of a percent. This results in a lower combined rate than the rates on your present loans most of the time. Thus, when total interest costs are lowered through the process of consolidation, credit is helped indirectly because one can pay off more principal. The lower rate is also beneficial in that it makes the longer repayment period of consolidated loans more acceptable.
Balancing the advantages of consolidation and credit risks
In conclusion, the consolidation of federal student loans can ease the process of repayment which in turn helps in building creditworthiness. However, it has some weaknesses which are that it leads to low credit scores in case of a long extension of obligation. Everyone’s situation is different. Thus, the consolidation benefits should be measured against credit disadvantages before deciding whether and how one should consolidate loans. If your goal is to achieve a lower monthly payment, look for the least amount of time that will enable you to make the payments. To determine the correct type of financial solution, check and compare the estimated total interest costs if your loans are grouped under consolidation propositions.
However, all the information presented here should help you make the right decision on whether or not the consolidation of student loans is right for your needs and credit. However, lower interest costs over time also contribute to making life easier with combined payments. Perform calculations to determine whether consolidation interest savings exceed additional interest charged from a longer repayment period. Minimize credit score deterioration during and after consolidation by ensuring that one does not default on any payments. Timely paying your loans and ensuring that credit utilization rates are kept low will support your credit scores far more than a Student Consolidation Loan will ever harm them.
Ready to boost your credit score? Call +1 888-804-0104 now for the best credit repair services near you! Our expert team is here to help you achieve financial freedom and improve your credit. Don't wait—get started today!