Will Consolidating Student Loans Help My Scores?

Student loans can reach into the hundreds of thousands of dollars, so a consolidation loan could save you thousands. However, even though the lender might claim it will positively affect your credit score, the effect, if any, will probably be nominal in either direction. Installment loan debt is not nearly as important to credit scores as revolving debt. Just having an installment loan is sometimes the most important thing.

How It Affects Score

Consolidating student loans into one account causes a few points of damage to your credit score because the new lender will perform a hard inquiry into your credit history. Also, a new loan lowers the average age of all accounts, and if the original loans contained your oldest account, eliminating them will shorten your overall credit history. Since you are just shifting debt around, it has no effect on your debt load; it may even increase it, if the consolidation loan has origination fees. On the plus side, you can start building good history on a new account and still retain the old, positive accounts on your report for 10 years.

Considerations

Consumers with an elite credit score usually have twice as many credit card accounts as they do installment loans, so reducing your installment accounts by paying off student loans could boost your mix of revolving to installment accounts to the more optimal ratio of 2:1, according to MintLife. However, the credit check could be the most important factor if you have at least five other credit checks in the past year. Once you get past six hard checks, the FICO score considers you a very high credit risk.

Combining Existing Accounts

If all of your student loans exist with the same lender, that lender will not perform a hard credit inquiry, so it will probably have no effect or a slightly positive effect on your score if it means you can make payments on time more easily. Even if your score goes down, you can usually recover in a few months, as long as you do not add more debt to your profile.

Tip

More important to your creditworthiness is your monthly total debt bills to monthly income. If you make $3,000 a month, for example, and pay $600 to all of your lenders, you have a DTI of 20 percent. Lenders probably won't consider an application for credit unless your DTI ratio is less than 20 percent, according to Steve Bucci of Bankrate. Consolidation might help your DTI if it results in a lower overall monthly payment.