Consolidation Can Improve Your Credit | 03.31.10
Seems strange, doesn’t it? You wouldn’t think that taking out a new consolidation loan could actually benefit your credit score and history, but you would be surprised of the positive impact it has on your record.
Let’s think about the process abstractly for a moment. Say you have six federal loans, and three private student loans accruing interest on your credit history. This means that you have nine open loans under your social security number, not including any revolving lines of credit (credit cards, store cards) you may have, among other potential things. The object of the game is to have as few items on your credit record as possible, while keeping them all up-to-date on payments and establishing solid account history with them.
If you think about it, staying on top of at least nine monthly payments (likely to different banks) while juggling other financial obligations like rent, utilities, etc. can end up being a very tricky (and expensive) lifestyle. It becomes much more easy to miss one of those 9 payments every month and potentially blow up a land mine on your credit score and history.
So here’s where consolidation comes in. Although you cannot consolidate private and federal loans together (it’s illegal, and probably wouldn’t actually benefit you), the two types can be consolidated separately. In this situation, you would be able to melt the six federal loans down into one and the 3 private loans down into a second consolidation loan. Effectively, you are now making two payments a month which is much easier to deal with, likely at lower monthly rates, and you have more time to pay them back. You are of course going to pay more interest over the life of the loan, but that is the trade-off to making your monthly payments more affordable and easier to manage.
Now, back to how this can improve your credit. Consolidation works in the background by paying off all your existing loans and then creating one new big loan at a new interest rate. This means that on your credit record, it will show that you successfully paid off nine student loans and opened two new ones. To a human, this would look strange… but to the program that is running the credit score formula, it looks like you just had a ton of debt lifted from your shoulders. The end result: your credit score goes up at least slightly.
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