Will Consolidating Student Loans Help Your Credit Score?

In the United States, some 44 million borrowers currently owe more than $1.5 trillion on loans they took out to finance their education. So, if you’re sitting on a pile of student loan debt, it’s safe to say that you’re not alone.

To cut to the chase, the answer to whether consolidating student loans can improve your credit score is yes – at least for some people. If you’re looking for ways to improve your credit scores, a student loan consolidation could potentially help you out.

Of course, before you can understand how a student loan consolidation may impact your scores, it’s helpful to consider how the loans affected your credit scores in the first place.

Multiple Student Loans on Your Credit Report

If you’re like a lot of graduates, there’s a good chance you make a single student loan payment each month to a student loan servicer. Depending on who is servicing your loan, you might send your monthly payment to any of the following (just to name a few):

  • Nelnet
  • Navient
  • FedLoan Servicing
  • OSLA Servicing

You don’t actually owe the debt to your student loan servicer. Rather, the servicer (assigned by the U.S. Department of Education) handles billing and other services with respect to your federal student loans.

The fact that only one monthly payment is being made leads many people to believe that they have just one really big student loan. In reality, many graduates have multiple student loans.

Each semester you applied for educational financing, a separate loan was created when/if your application was approved. So, if you applied for student loans each semester during a standard four-year undergraduate schedule, you could have as many as eight separate loans on your credit reports because you received eight disbursements.

After your loans come out of deferment, you’ll generally make a single monthly payment to your servicer. The servicer will credit that payment across your various loans.

How Consolidating Student Loans Impacts Your Credit

When you consolidate student loans, you’re actually taking out a new, larger loan and using it to pay off all of your other student loan accounts. Those old student loans won’t disappear from your credit reports; however, they should all be updated to indicate a zero balance. Your new loan will be added to your reports as well.

Credit scoring models consider the number of accounts on your credit reports with balances. This isn’t a huge factor in your credit scores, but by reducing your number of accounts with balances, there’s a chance you might see a score increase. And, of course, every point matters, especially if your scores aren’t as high as you’d like them to be.

Additionally, consolidating student loans is a good way to protect your credit from potential damage. Imagine the following scenario: You accidentally forget to make a payment for two months to your student loan servicer. You check your credit reports and discover that you have eight accounts that are reporting as 60 days late to the credit bureaus. The credit score damage in this hypothetical scenario could be significant.

On the other hand, if you had consolidated your student loans down to a single account, that same oversight would only result in one account on your credit reports with a 60-day late payment. That late payment would probably still be bad for your scores, but the impact wouldn’t be nearly as severe as eight past-due accounts.

Should You Consolidate Your Student Loans?

Credit reports, and the scores used to interpret those reports, vary widely. An action which helps one person’s credit score might not have the same impact for the next person. Although many people can experience a score boost from consolidating student loans, your experience isn’t guaranteed to be the same.

As such, your credit should only be one factor you consider as you decide whether or not to consolidate your student loans. You should also consider whether a consolidation loan will save you money and be the right financial move in the long run.

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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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