Can Student Loan Consolidation Improve Your Credit Score?
By carrying out a successful loan consolidation, you can not only reduce your total interest paid in the long term, but can also improve your credit score.
A good credit score is very important when you are looking for a job (employers sometimes check your credit and don’t want to see “black marks” there), renting an apartment (landlords want someone who has a good record of paying on time), opening a new credit card account, or seeking a loan for a car.
Here are some tips for you that explain how consolidating your student loans may affect your credit score:
- The more open accounts you have, the lower the credit score:As a student borrower, you might have up to eight separate loans to pay for your education. Each loan has a different principal amount, payment terms and interest rate. The more accounts you have, the lower the overall credit score. So, reducing the number of open accounts by consolidating all those loans into one, may improve your credit score.
- The lower your monthly loan payment obligation is, the higher the score:The total amount of your monthly minimum payments on loans and credit lines is taken into account when calculating your credit score, and the higher that payment commitment is, the higher the score will be. When you hold several loans, the payments on all those loans are added together and considered part of your monthly payment obligation. If you consolidate your loans, you have only one monthly payment to make, which is normally lower than the minimum amount would be if you still had multiple separate loans.
- Your debt to credit ratio is important:The debt to credit ratio measures the amount of debt you have against the amount of credit you have available. So, if you have a total of $10,000 available on three credit lines and you owe $2,000, your debt to credit ratio will be lower and your credit score better than if you owe $2000 while you have $3000 of credit available. If you have several loans with the maximum credit used, it will reflect negatively on your credit score.