Will Consolidating Student Loan Debt Hurt My Credit Score?
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When you’re a college senior, you might feel that graduation can’t come fast enough. And while it’s certainly an occasion to celebrate, graduating college also means it’s time to start paying back all those college loans you’ve accumulated.
According to a report issued by the nonprofit Institute for College Access and Success, two-thirds of college seniors who graduated in 2011 had loan debt, which averaged $26,600.
While the amount of student loan debt you have can vary depending on the type of college you attended—public or private—and the state in which you attended school, even a manageable amount of student debt can seem overwhelming when it’s spread out over a few loans.
The good news is that it’s possible to consolidate all your student loans into a single loan. Consolidating your student loans can lower your monthly payments by giving you longer repayment periods and, in some cases, it can also give you access to alternative repayment plans.
When you merge several loans into one, a single lender pays off your existing debt and then issues you new debt. The new loan generally has a repayment period that is between 12 and 30 years longer than your previous loan, and this longer term results in a lower monthly payment.
In addition, the interest rate on the new loan is fixed at a certain rate, so even if student loan interest rates increase over the term of your loan, your rate will stay the same.
While consolidation has its perks, be aware that the move can also affect your credit score. It’s important to understand how your score will be affected before you make up your mind to consolidate your college loans.
Your credit score could take a small hit—at first. A consolidation triggers a hard inquiry into your credit history that is akin to what happens when you apply for a new credit card or submit a rental application. The inquiry could ding your score by a couple of points, and it can remain on your credit report for two years. But as you continue to make on-time payments on your loans, you can positively impact your score.
Opening new accounts can also can lower your average account age, which could negatively impact your credit score at first. Account age makes up 5 percent to 7 percent of your Equifax credit score.
Each person’s credit history is different, though, so it’s impossible to tell exactly how big an impact a hard inquiry or new account would have on your individual credit score.
A lower monthly payment could make it easier to pay on time. Approximately 35 percent of your Equifax credit score is based on your payment history. This includes on-time payments on credit cards, mortgages, and student loans. If the lower monthly payment makes it easier for you to make your payments on time, it is likely to have a positive impact on your credit score.
Student loans are often seen as good debt. Good debt can be considered as an investment in something that creates value, and it can help you improve your creditworthiness when you continue to make on-time payments.
You will diversify the types of credit you use. Keep in mind that a student loan is an installment loan rather than revolving credit. Having different types of credit can positively impact your score as long as all of the accounts are paid on time. The types of credit used make up 15 percent of your Equifax credit score.
The biggest impact consolidating your student loans can have on your credit score is fairly basic: If you’re unable to make your monthly payments, obtaining a lower payment through a loan consolidation can help. Consistently making on-time payments is the best thing you can do to positively affect your credit score.
Remember that loan consolidation may result in you paying more in interest than you otherwise would have because you will be repaying the loan over a longer period of time.
However, as you move up in your career, you may eventually be able to pay more toward the principal of the loan so that you can reduce the amount of interest you will pay in total. By doing so, you may even be able to repay your loan early.
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