Student Loan | Student Loan Consolidation And Bad Credit – Do They Go Together?

January 15, 2012 – 3:52 am

Whether or not consolidation is a smart financial move for you really depends on your situation. Because of the complex web of possibly repayment plans and the formula that determines federal consolidation loans’ interest rates, there is no one-size-fits all answer. Sometimes it saves you money and sometimes it doesn’t.Even if it doesn’t, paying more in order to secure a lower monthly payment makes sense for some people and not for others. It’s a highly personal decision.

If you do decide that consolidation is a step you want to take, you might be worried about its impact on your credit. Will consolidation put a black mark on your credit report? And if so, how big will it be? Well, rest assured, because consolidating your student loans will not hurt your credit.

Credit bureaus classify debt in two ways: good debt and bad debt. credit card debt, for example, is bad debt. It will lead to nowhere but more debt. Student loan debt, on the other hand, is good debt. You are borrowing money so that you can get a better job and make more money in the future. You are going in to debt only to better yourself.

What’s more, consolidation might even increase your credit score. Let’s say you have eight Student Loans. That lists as eight separate creditors on your credit report, and eight separate accounts for which you are all in the hole. But when you consolidate them, it rolls them up into a single loan. Now your credit report reads that you have just one creditor, and your credit has accordingly gone up.

Also, having a lower monthly payment to make also lowers your score. Credit bureaus weigh your current income against the amount of payments you need to make monthly. If you are paying off several student loans and it adds up to a substantial chunk of your income, your credit will be lower. But getting a lower monthly payment and freeing up some of your income can raise your credit as well.

When determining your credit score, bureaus also look at the open lines of credit you have that are currently being used, as opposed to ones that aren’t. If you have eight loans and are paying on all of them, they are all considered open lines of credit that are being used. But if you have just one consolidation loan, your credit report only lists one line of credit that is being used. One line of credit versus eight can mean a significantly higher score.

So there is no need to be concerned that there is a relationship between student loan consolidation and bad credit. On the contrary, it actually causes your credit rating to improve most of the time. So if you think consolidation might be the best thing for you, go for it. Your wallet (and your credit rating) will thank you.


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