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Does Student Loan Consolidation Affect Credit Score

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How Does My Credit Score Affect My Ability To Get A Student Loan

How Do Student Loans Affect Credit Scores?

Home> Students & Debt> How Does My Credit Score Affect My Ability to Get a Student Loan?

The yearly cost for a college degree can total $50,000 or more, a price tag that requires most students to turn to student loans. Unfortunately, many students worry that their credit score could stand between them and the loans they need to get to graduation.

But theres good news: Having a negative credit score or a lack of credit history by no means prohibits you from receiving loan approval. Instead, credit may determine what types of loans and interest rates are available to you.

Here are options for students concerned about credit:

Ways To Ensure That Refinancing Doesnt Hurt Your Credit

Refinance student loan credit score requirements arent too stringent, but to qualify for the best interest rates, youll want to have a high credit score and a solid, stable income. If not, refinancing may not be the right fit for you.

If you do qualify for better terms than what you have now, though, here are some ways you can limit the negative impact of refinancing on your credit score and instead use your new loan to build credit.

Complete Your Rate Shopping Quickly

Refinancing your student loans is a big decision, so you dont want to go with the first offer you see. Instead, take time to compare your options and find the lowest interest rate. Many lenders make it easy to prequalify for an offer with no impact on your score.

That said, you wont get a final offer with any lender until you actually complete an application so you could find the best offer in the prequalification process, then end up with a higher rate when you move forward to apply.

A full application will require a hard credit check, but FICO wont count every single inquiry against you as long as it can see a pattern of rate shopping for a single loan. If you have the time, its a good idea to apply with multiple lenders to get a better comparison, but to do so within as short a time frame as possible.

Takeaway: Dont worry too much about applying with more than one lender. Just make sure to do it all in a short period so FICO will combine all applications into one inquiry when calculating your credit score.

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Can Debt Consolidation Hurt My Credit Score

Debt consolidation has the potential to hurt your credit score in several ways, depending on which method you use. For people using a debt management plan for consolidation, it is important to fully understand your agreement with your credit counselor. It is also important to know whether you are working with a credit counselor from a not-for-profit organization, or if you are working with a for-profit debt settlement/consolidation firm.

Whats The Difference Between A Hard And Soft Pull

How do Student Loans Affect Credit Score?

A hard pull happens when a lender checks your credit score to make a final lending decision. These stay on your credit report for about two years, and they can slightly lower your scoreespecially if you have quite a few of them.

When you shop around for lenders to refinance your loan, theyll typically do a soft pull to make an initial offerand that wont affect your credit. A lot of lenders will disclose the type of pull theyll do during the application process. If they don’t, ask.

Once youve agreed to their initial offer, theyll do a hard pull. Youll get that one pull on your credit, but you wont get one from every lending company you apply toonly the one you decide to go with. A single hard pull isnt likely to hurt your credit.

You can minimize the impact of multiple hard pulls on your credit by limiting your shopping around to about 15 days. If all the inquiries are clustered together, the credit bureaus will assume that you’re doing some comparison shopping.

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You Cant Lower Your Interest Rate When You Consolidate Federal Student Loans

The benefit to consolidating your federal loans is that you go from having two or more loans to just one. You also can take any variable rates and turn them into one fixed rate. And that can definitely make lifeand budgetinga whole lot simpler. But dont look to federal student loan consolidation to provide your winning ticket to a lower interest rate. What happens most often with federal student loan consolidation is that, yes, you get a lower monthly payment, but its because youve extended the length of the loan. Youre paying less each month but for longer, so you dont save money.

You Get Penalized For Hard Inquiries

Whenever you apply for a student loan consolidation, a lender has to make a hard inquiry on your credit. Hard inquiries are situations where youve applied for a line of credit. For example, things like a credit card, mortgage or auto loan are hard inquiries. If you have too many of these types of inquiries within a short period, it could temporarily lower your credit score. Borrowers with newer credit histories are also more likely to have a few points knocked off their score for just one hard inquiry.

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Will Rate Shopping Different Student Loan Lenders Hurt My Credit

This question pops up a lot from grad school borrowers and people who are refinancing student loans to get the best interest rate possible on a private loan.

One factor that can be a red flag for FICO is the number of inquiries it receives from lenders wanting to see your credit report. In other words, if it looks like you apply for more credit often, it could hurt your score. But the good news is that FICO attempts to distinguish between a request for a single loan and a request for many new credit lines. As long as you rate-shop in a concentrated period of time, you should be OK.

If you really want to avoid inquiry overload, do your homework before applying for a loan. Private lenders typically list online the range of rates they offer, as well as general eligibility criteria. Researching that information will give you a good idea of whether youll qualify before you formally apply.

Also, you may want to ask lenders if they can tell you the interest rate you would receive without doing a hard credit pull, which might affect your score. You cant get a loan without an eventual hard inquiry, but getting prequalified allows you to compare interest rates with no effect on your credit score.

How To Apply For A Debt Consolidation Loan

How Student Loans Affect Your Credit
  • Research lenders: Consider the types of loans and interest rates lenders may offer you. They typically look at factors like credit score, income, current debts and debt-to-income ratio. To find personalized loan offers based on your credit history without affecting your credit score, check out LendingTrees personal loan marketplace.
  • Apply for prequalification: Prequalify for a loan by submitting details to lenders like your income, debts and credit history. Theyll conduct a soft credit inquiry which doesnt affect your credit score to determine whether youd likely qualify, and for what terms. Prequalification doesnt guarantee loan approval but is a great way to research terms you could see with a lender.
  • Compare offers: Compare loan offers by looking at each offers APR and other terms, as well as fees. Personal loans often come with origination fees that range from 1% to 8% of the amount owed, and some also come with late payment fees and prepayment penalties.
  • Choose a lender and submit a formal application: Once youve picked a lender, gather necessary documents, like proof of income, income and other forms of debts. Before they formally approve you, lenders will do a hard credit check.
  • Start paying off existing debt: If youre approved, your lender will deposit the entire loan amount into your bank account so you can begin paying off your debts. Stick to your monthly payments to avoid late payments that might damage your credit.

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Most People Shouldnt Worry About Their Credit Score When Refinancing

The desire to improve and protect a credit score is responsible, but it shouldnt be the first consideration.

The value of a high credit score comes from the ability to secure desirable terms in lending. In other words, the value of a good credit score is the chance to save money.

The purpose of refinancing or consolidating student loans is to save money. If the credit score is high enough to qualify for a low rate or favorable repayment plans, then the credit score has done its job.

In many cases refinancing or consolidation can save hundreds of dollars per month and thousands of dollars per year. With that much money at stake, worrying about what Equifax or TransUnion thinks seems a bit silly.

The one exception would be for borrowers who are looking to purchase a home in the near future. A fractional difference in the interest rate on a mortgage can make a huge difference to the homeowner. People on the hunt for a house should discuss any actions that might impact their credit score with their lender or mortgage broker. The home loan experts should be able to recommend the best path forward.

What Is A Debt Consolidation Loan

In simple terms, debt consolidation loan means merging all your existing loans into one loan with lower interest rates and easier payment. The advantage of a debt settlement loan is that consumers pay from one monthly payment to different creditors to one creditor each month. This can significantly reduce your stress and make the repayment process easier.

You can make consolidated loans in different ways, depending on your circumstances, the amount of debt and your credit score. Debt consolidation loans are especially useful when our debt is not too high. Consumers usually receive better interest rates on personal loans than credit card rates. In general, these loans facilitate quick repayment with favorable interest rates but short payment terms. Therefore, monthly payments may be slightly higher, but the debt will be eliminated in a shorter period of time with less interest paid by the consumer.

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Do Student Loans Affect Credit Score

Many people think of their total student loan debt as one lump sum. However, unless youve consolidated your debt, that lump sum is probably made up of several loans with different interest rates and repayment periods. And theyre all categorized as installment loans. Mortgages and auto-loans also fall under this category.

Because installment loan balances fall over time, credit score algorithms such as FICO treat them differently than credit card debt and other types of revolving debt.

Why is this a good thing? Because it means that student loan debt will have less of an impact on your credit score than credit card debt. For example, $20,000 in student loan debt wont hurt your credit score the way $20,000 in credit card debt will.

In fact, FICO reported that 7% of consumers with $50,000 or more in student debt had credit scores of at least 800.

The most important factor in how student loans will affect your credit score is your payment history.

How Debt Consolidation Affects Your Credit Score

How Do Student Loans Affect Your Credit Score?

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Debt consolidation helps you pay off existing debt with a new loan or line of credit, preferably one with more favorable terms like a lower interest rate. Under the right conditions, debt consolidation can help lighten a financial load. But one factor often gets overlooked: Debt consolidations can hurt or help your credit.

Heres what happens to your credit when you consolidate debt. And if youre worried about taking out a new loan or line of credit, youll find two alternatives as well.

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You Decrease Your Average Account Age

Account age consists of 5 to 7 percent of your credit score. For young borrowers, student loans might be the first line of credit they ever applied to receive. If they become paid off through a student loan consolidation, that could drastically decrease the age of your oldest account, and therefore lower your credit.

All of these hits to your credit are temporary, and most experts agree that its more important to pay off your student loan debt than worry about small drops in your credit score.

Can Debt Consolidation Affect Your Credit Score

Debt consolidation has the potential to help or hurt your credit scoredepending on which method you use and how diligent you are with your repayment plan.

The strategy is considered in situations where people want to streamline the repayment of multiple high-interest debt amountsoften with the hopes of saving money and lowering their debt burden. Debt consolidation is typically used by people who have mounting debt and want to reduce the number of lenders they have to pay each month.

While eliminating or lowering your debt may help your credit score over time, debt consolidation is not typically used as a strategy to increase your credit score. It is used as a method of reducing or eliminating debt.

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What Are The Pros And Cons Of Student Loan Consolidation

The number one advantage of student loan consolidation is a simplified loan payment. You also have the option to select a longer loan term that can reduce your loan payment. Depending on the loans you have, there may be some downsides to student loan consolidation. Perkins loans, for example, may be forgiven for teachers and other public servants. Consolidating them would eliminate access and enrollment to this loan forgiveness option. Additionally, any grace period or deferment you have with your current loan program also goes away if they are consolidated.

How Does Refinancing Student Loans Affect My Credit

How do student loans affect credit scores?

Its smart to shop around for the lowest rate before refinancing student loans, especially if you can do it without dinging your credit. Either of the following options will keep you from having multiple hard inquiries on your credit report.

  • Apply for all the loans youre comparing within a 14-day period. Under the FICO credit scoring model, multiple hard inquiries of the same type such as student loan inquiries count as a single inquiry if they happen within a short period. Various versions of the credit scoring model specify different time frames including 14, 30 and 45 days but youll be covered under all of them if you submit all your applications within 14 days.

  • Get rate estimates through lenders pre-qualification processes. Some lenders let you get a rate estimate that wont affect your credit.

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Do The Credit Scores Of My Parents Matter

Parents can apply for loans to pay for your education through the Federal PLUS program and unsubsidized Stafford loans.

While these PLUS loans arent strictly based on credit scores, an adverse of a parent can keep them from being approved for this type of loan. The type of adverse history that could prevent approval for PLUS loans includes 90 days delinquency on payments or a loan in default. However, if a parents credit score is low for another reason, such as the occasional late payment, they may still be eligible.

If PLUS loans are denied, parents may receive unsubsidized Stafford loans which are not based on credit history, but do require that interest is paid while students are in school.

How To Consolidate Your Student Loans

If you would like to consolidate your federal student loans, you can complete the Direct Consolidation Loan application online or submit an application by mail. Once you submit your application, allow up to 60 days for it to process.

You should continue to make your regular payments on your loans, if payments are currently due, until your consolidation has been approved, says Jessica Ferastoaru, student loans specialist for Take Charge America. Once approved, you will have one monthly payment due to the new servicer managing your Direct Consolidation Loan.

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Taking Out A Personal Loan For Debt Consolidation Can Save You Money

Consolidating your debt could help you save money in the long run. There are two main ways this might happen:

  • Lower rate: Could qualify for a lower interest rate on a personal loan compared to what youre already paying
  • Quicker payoff: Might be able to pay off your debt more quickly than if you continue making the minimum payments on other debt
  • For example:

    If you decide to take out a personal loan for debt consolidation, remember to shop around and consider as many lenders as you can. This way, youll be able to find the right loan for your needs.

    Credible makes this easy: You can compare your prequalified rates from multiple lenders after filling out just a single form.

    Ready to find your personal loan?Credible makes it easy to find the right loan for you.

    • Free to use, no hidden fees
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    • More options, pick the loan option that best fits your personal needs
    • Here for you. Our team is here to help you reach your financial goals

    Other Approaches To Debt Consolidation

    How Do Student Loans Affect Your Credit Score?

    There are also other ways you might consolidate debt besides using a personal loan or balance transfer card. Here are a couple of alternatives you might consider if youre a homeowner:

    • Home equity loan: This type of installment loan uses the equity in your home as collateral. Because of the reduced risk to the lender, home equity loans generally come with low interest rates. However, keep in mind that if youre unable to make payments, your home could be at risk.
    • Home Equity Line of Credit : A HELOC is another type of loan secured by your homes equity. However, unlike a home equity loan that gives you a lump sum payment, a HELOC is a revolving line of credit meaning you can continue drawing on and paying off your balance. Just remember that you could lose your home if you cant keep up with your payments.

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