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Will Consolidating Student Loans Help Your Credit?

You borrowed a ton of money to pay for your tuition and other college expenses. After four years, give or take, you graduated and entered the real world. And, at the same time your student loans came out of deferment and landed squarely on your credit reports. Now what?

Due to the fact that borrowers often make a single monthly payment for their student loan debt, many graduates are actually quite surprised to learn that they have multiple student loan accounts appearing on their credit reports. In fact, even if you used the same lender over and over again, the fact of the matter is that you actually opened a brand new account and took out a new loan each time you filled out a financial aid application and accepted funds. Each disbursement of funds you received will typically be reported on your credit reports as a completely separate account.

For many consumers this could mean you took out a new loan every single semester during your undergraduate and (if applicable) graduate studies as well. Therefore, even for a standard 4-year bachelor’s degree you could easily have as many as 8 separate accounts showing up on your credit reports if you consistently relied on student loans to finance your education.

Do Multiple Loans Hurt My Credit Scores?

To some degree, yes, having multiple student loans appearing on your credit reports may cause a small amount of credit score damage. This is true even if your student loans are in deferment, in forbearance, or if you are actively making on-time monthly payments. The reason why the existence of multiple student loans, even those with no negative payment history, can be have a negative impact on your credit scores is due to the fact that scoring models like FICO and VantageScore consider the number of accounts with balances currently appearing on your credit reports in their scoring processes. The more accounts you have with balances, the more problematic for your scores. Of course, as long as your student loan payments are made on time, the actual negative impact which multiple student loan accounts would have on your credit scores is generally going to be minimal.

Why Consolidation Might Help

Not only can consolidating your student loans potentially lower your monthly payments and perhaps save you some money, doing so also has to potential to help your credit scores. Here are two reasons why consolidation might be worth considering.

1. Reducing Your Number of Accounts with Balances

As mentioned above, while it is not a huge factor in your credit scores FICO and VantageScore do look at how many accounts you have with balances. When you consolidate your student loans you can essentially pay off all of your smaller student loan debts immediately and convert them into one larger loan. You’re in the same amount of debt but only have one account rather than many. By consolidating you are able to easily and quickly reduce the number of accounts appearing on your credit reports with outstanding balances, which certainly has the potential to help your credit scores.

2. The Danger of Late Payments

Late payments on student loan accounts can actually sometimes be more problematic for your credit scores than a late payment on another non-student loan account. The reason why late payments on student loans might cause you more credit score damage is not because a single student loan payment is judged more harshly than another single late payment. However, although you may only be making a single monthly payment to your lender, if you have multiple student loan accounts like most graduates then the lender is dividing up that single payment you make amongst your multiple accounts. Therefore, if you fail to make the agreed upon monthly payment to your student loan lender or processor then you could wind up with a late payment showing up on multiple accounts. It is easy to understand that 8 late payments showing up on your 8 student loan accounts is going to have more of an impact than a single late payment. Consolidating your student loans eliminates this possible problem.

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John Ulzheimer

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