Will Consolidating My Student Loans Help My Credit Score
The cost of higher education is already more than most people can afford. It continues to grow exponentially. As a result, students have to take out multiple loans to pay for their education. These may be private or federal loans. This often leaves students paying multiple loans each month. They may find that they cannot afford the loan payments and have enough money to pay for basic needs.
There are many students looking at consolidating their student loan debt. While this is available as a viable option, it may leave you with a lot of questions about your options. For example, one of your primary questions may be, will consolidating my student loans help my credit score? Continue reading to find out more information about the impact that consolidating debt has on your credit.
Will Consolidating My Student Loans Help My Credit Score?
The short answer is, yes, consolidating your student loan can positively impact your credit score.
It is helpful to understand how debt impacts your credit score to understand how consolidation makes a difference truly.
There are a number of factors that impact a credit score:
One is how well you handle your debt. Do you pay your bills timely and in the correct amount? Have you ever stopped paying on a loan and gone through the collections process?
Another factor is your debt to income ratio. Debt to income ratio is the percentage of your monthly income that your debt takes.
When you consolidate your student loan debt, you are combining all of your loans into one, typically at a lower interest rate.
This gives you a lower monthly payment, making it easier to pay each month. When you have a lower payment, you have more money left over for your basic needs. This also lowers the percentage of your monthly income that goes towards debt.
Will Consolidating My Debt Hurt My Credit?
Most likely, when you consolidate your student loan debt, it is going to improve your credit score. However, you should understand the entire process to know at what points along the way it could negatively impact your credit score.
When you consolidate debt, lenders access your credit report with a hard pull or a hard inquiry. A hard pull means they are accessing your entire credit report to determine your credit worthiness.
A hard pull of your credit can cause a small and temporary drop in your credit score. This drop typically happens for just a few months. Then it should go back up. However, this small negative may be outweighed by all the positives. Your situation is unique, and you have to determine for yourself if it is worth it.
How Do I Know If Student Loan Debt Consolidation Is Right For Me?
Determining if you should consolidate your debt may be a stressful decision for you. You may not be able to decide if it is the smartest decision that you can make. However, there are some reasons why you should consider consolidating your debt.
If any of these apply to you, then it may be the path you should choose:
If you would like to reduce the number of loan payments you make to just one, consolidation might be your option. If it is challenging to keep track of all your loans and make the payments, consolidation can simplify and streamline that for you.
If you have a high-interest rate, debt consolidation may be a way to decrease your interest rate and make your payments lower. Interest rates change over time, and you may be able to get a better deal now. A lower interest rate usually means you have a lower monthly payment. A lower monthly payment allows you to have extra monthly cash to pay your bills or maybe go out to dinner once in a while. It is essential to note that this could extend the life of your loan over more years. You may pay less per month but for a long period of time.
If you are interested in paying off your loans faster, consolidation may be the right way to go. If you have only one payment per month and it is for a lower amount, you may be able to double up on your monthly loan payments. This can help you pay off your loans faster.
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Federal Loans vs Private Loans
Private loans come from credit unions, banks, or other financial institutions. A private loan can be used for any expenses, including tuition, books, room and board, and living expenses. These loans are not based on need. You must have a credit check to determine your creditworthiness to be approved for a private loan. Those that have poor credit may need a co-signer. These have higher limits than other loans.
Federal loans come from the U.S. Department of Education. They often have lower interest rates along with flexible repayment plans. However, there are specific forms that must be filled out to obtain a loan. In addition, there are many questions about income and investments.
When you consolidate federal loans, they will be combined together, so you have only one payment per month, which is a lower amount. You can still have access repayment plans that the government offers.
You do not have to pay an origination fee when you consolidate federal loans.
When you consolidate federal loans, you lose credit for payments you made towards plan forgiveness.
Your monthly payment may be lower, but you may have to make payments for a longer period of time.
The consolidated interest rate is based on current credit rates, not credit scores.
When you consolidate a private loan, you can combine all of your loans into one lower payment. As a result, you can get a lower interest rate on your loans, saving money over the entire life.
In addition, repayment plans are more flexible when consolidating your private loans.
When you consolidate a private loan, you cannot access income-driven repayment options. If you currently have a deferment plan and you consolidate, you have to begin repaying your loan.
In addition, you may have to pay an origination fee when you consolidate private loans.
Need More Help?
Consolidating your debt is a big decision, and you may still have more questions. You may still not be sure about the answer to the question of will consolidating my student loans help my credit score; no need to worry because Goalry is here for you.
We have numerous resources on our website, including a link to our Debtry store. The Debtry store is the place where you can find the answers to all your debt consolidation questions. We have experts available to answer questions in addition to videos and articles geared toward helping you make the best decision for your unique situation.
Conclusion
As a student entering the workforce, you face many decisions and exciting changes. Determining what to do with your student loan debt is one of those questions that may be burning on your mind. This article provides enough information to help you make that determination.