How does student loan consolidation affect your credit rating?

In making it easier to pay off student loan debt, many borrowers turn to student loan consolidation. This process can truly be a win-win situation in that the lenders are repaid, and the monthly payments can be a lot easier for the borrower to handle.

In many cases, a borrower may obtain a lower interest rate on their consolidation loan, in addition to a longer repayment term. This alone can make what was once a difficult financial situation into something much more manageable.

Consolidating Loans and Your Credit Rating

Before pursuing any type of financial transaction, it is always a good idea to determine how it will affect your credit rating. This is because a lowered credit score can make it more difficult to obtain credit and other loans in the future.

In the case of consolidating your student loans, the good news is that this process can actually have a very positive impact on your credit score and it can do so almost immediately after your consolidate.

This is because one of the ways you are rated for your credit score is not just in the amount of debt that you carry, but also how many different loan obligations that you have. Therefore, if a borrower has five student loans, each with a $10,000 balance, he has a total of $50,000 in student loan debt.

When being viewed by the credit bureaus, this individual is seen as having numerous creditors, each requiring a different payment and interest rate all of which obligate the borrower to a minimum payment each and every month. This essentially gives the borrower a high debt-to-income ratio.

Once this borrower consolidates his student loans into one single loan, it is likely that his payment will be much lower than the total of the five payments he was previously making and this lower amount of payment is a big positive factor on his credit score. In some cases, this alone could raise a borrower’s credit score by 100 points, depending on their overall credit situation.

You can use our student loan consolidation and refinance tool to help determine the likelihood of you being approved and what your estimated payment may be.  The best part is this initial step does a “soft” credit pull and will not affect your credit rating.  Just click on the link below:

Refinance Loans

Improving Payment History

There is another way in which the borrower’s credit score could be raised as well. One’s payment history is also very large factor in the overall credit score determination. When a borrower consolidates loans, they are essentially “paying off” their old loans with the new one.

Therefore, in the case of the borrower with the five student loans, he will be paying off five loans in return for just one loan when he consolidates. On his credit score, his credit history will show that he paid in full all five of his previous loans even though he has one new loan with a corresponding total balance.

Going forward, a student loan consolidation can help to keep a borrower’s credit score healthy as well. This is because the one new lower payment will be much easier for the borrower to pay each month.

With all of the positive factors involved with student loan consolidation, it should be a consideration for any student borrower who is having trouble paying down their debt, and/or those who would like to simplify and lower their monthly debt payment obligations.

Refinance Loans