Does Student Loan Consolidation Affect Your Credit Score? (2024)

FAQs

Does Student Loan Consolidation Affect Your Credit Score? ›

Additionally, because you're just consolidating existing debt instead of taking on new debt, your amount owed won't be affected either. However, the new loan account will impact your length of credit history, including the average age of your accounts, which can affect your FICO^® Score^☉ .

Consolidating your federal loans has little direct effect on your score over the long term. Its effect on your age of credit accounts might temporarily lower your score. However, if consolidating means securing a lower, more manageable payment or unlocking federal benefits, the impact on your credit might be worth it.

Impact on Credit History: Consolidation could initially cause a minor dip in your credit score due to the hard inquiry associated with the new loan application. This effect on your payment history is usually temporary and can be offset by making timely repayments on your new consolidated loan.

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

Since student loans are a type of installment credit, having them on your credit report adds to your "credit mix," which makes up 10% of your score calculation. This is good for your credit since it adds variety to the kind of loan products you have and shows you can manage different types of debt.

If You Have Unpaid Interest, Your Principal Balance Goes Up

When loans are consolidated, any unpaid interest capitalizes. This means your unpaid interest is added to your principal balance. The combined amount will be your new loan's principal balance. You'll then pay interest on the new, higher principal balance.

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

Debt consolidation puts multiple debts into a single account to make your payments easier. Debt consolidation can lower your credit score temporarily, but your score will improve if you make payments on time.

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

How long is your credit bad after consolidation? ›

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

Downsides of debt forgiveness

Debt forgiveness may negatively affect credit scores, making it challenging to obtain future loans or credit. Forgiven debt of more than $600 may be considered taxable income, potentially resulting in a hefty tax bill.

Additionally, because you're just consolidating existing debt instead of taking on new debt, your amount owed won't be affected either. However, the new loan account will impact your length of credit history, including the average age of your accounts, which can affect your FICO^® Score^☉ .

As long as your loans were in good standing at the time they were discharged and your accounts are being reported properly to the credit reporting bureaus, you won't see a huge difference in your score. On the other hand, you could see your score drop if your account wasn't in good standing prior to the discharge.

“It just simply must be counted into their debts,” Argento says, “whether or not they are currently deferred.” Argento emphasizes, carrying student loan debt should not prevent you from considering buying a home. Instead, talk to your loan officer about how your student loan payments may factor into your application.

Settling your student loan debt is likely to hurt your credit score. Lenders report loan default to the credit bureaus, and you must usually be in default to initiate a settlement agreement.

Consolidating Student Loans with Bad Credit

If your score is under 650, It is unlikely you will qualify for consolidation from private lenders by yourself. You'll need to find a co-signer with good credit and continue to pay bills on time until your credit score improves. Things get more difficult without a co-signer.

It Could Change Your Credit Mix

If you have both revolving credit (like credit cards) and an installment loan (like a student loan), paying off your student loans will shift your credit mix. This could negatively impact your FICO score.

5 As we mentioned already, getting a lower monthly payment on a personal debt consolidation loan can lower your DTI and make it easier to qualify for a mortgage. However, the opposite is also true, and a debt consolidation loan with a higher monthly payment could make qualifying more difficult.