Student Loan Consolidation – Will it Affect Your Credit?

Student loan consolidation is a smart way to manage your student loan debt. It is also a great way to simplify your finances. Managing multiple due dates, fees and loan payments can not only be stressful, but it sets you up for missing those important due dates and payments. The result could be penalties, higher interest rates applied, and even more damaging, a drop in your credit score.

Consolidating your student loan debt will help you to avoid such pitfalls. Whether your student loan(s) are a federal student loan or a private one, you can consolidate your loans and enjoy the benefits of one lower payment and a reduced interest rate. It is the type of loan, however, that determines if your credit will be affected or not.

Federal consolidated loans are usually non-credit based and therefore bad credit is not a determining factor to receive a loan. Private loans relay heavily on your credit score, thus it is important to begin with a good credit score. However, both types of student loan consolidation will affect your credit score in a positive way, when you first consolidate your loans. Primary, by consolidating multiple loans into one loan, you can reduce your overall debt-to-income ration. This is an important component of a credit score, something you want to keep at a low ratio. Consolidation also affects your credit score by making it possible to pay down the loan quicker, again reducing debt ratios.

In fact, lower monthly payments on your consolidated student loans free up your monthly debt load. This allows you to be able to qualify for future loans for necessary purchases such as autos loans or mortgages. A good payment history of a variety of loans will increase your credit score.

Consolidating student loans can also prevent a poor report to a credit bureau. Lenders report to the credit bureaus and if you can not manage making multiple student loans payments on time, you risk rating a poor credit score. By choosing student loan consolidation your credit and your account both can remain in good standing. Occasionally however, borrowers can fall on financial hardships. If this happens to you, contact the lender and request a forbearance of deferment. This way your account can may be able to remain in good standing until you can get your finances in order.

The concluding answer to how consolidating student loans affect credit is a positive one. If you make your payments on time, take advantage of any loan benefits offered, and properly manage any other debt, your credit score should not be a problem.