Consolidating your student loans presents a number of benefits to most graduates who are under a pile of debt. You don't tend to directly save money on the loans by consolidating, but there are upsides that don't involve dollars and cents. Those benefits include having a smaller number of bills or payments, lower payments per month and the ability to set one fixed rate to avoid having to pay higher interest rates. However, consolidating student loans might not be worth doing if it negatively affects your ever-important credit score.
So, does consolidation affect your credit score? Yes, but not in the ways you might expect. Read below to learn how consolidating private student loans and consolidating public student loans will affect your credit.
The Negative Aspects of Consolidating Private Student Loans or Federal Ones
The first impact of either consolidating federal student loans or consolidating private student loans tends to be a negative one. When you do consolidate, your credit history is more likely to be closely looked into, not unlike when you apply for a new credit card or submit a rental application. If your credit history isn't 100% perfect then your score could drop a bit. However, if you're able to repay your loans on time and in full, the positive aspects of consolidating student loans will likely far outweigh the downsides.
The Positive Aspects of Consolidating Student Loans
Too many lines of credit can have a negative effect on your score, so, naturally, by consolidating student loans into a single account you have the opportunity to improve your score.
Additionally, most creditors consider student loans "good debt." They should, considering degrees tend to lead to people earning more money! Good debt is sometimes seen as investments rather than credit, which goes a long way to show your value to creditors as long as you keep consistently making those payments.
Yet another plus is that, whether you're consolidating federal student loans or consolidating private student loans, you will most likely be paying less per month. This will, of course, cost you money in the long run as more interest accumulates. But, if you avoid missed payments, your credit score will stay high. That can be much more valuable than the cost of the little extra interest you have to pay. One of the biggest dings to a credit score is simply not being able to make a payment. By consolidating student loans you can lower your immediate expense, which can save you from a potential credit disaster.
None of the decisions involving student loans are easy ones, but when it comes to consolidating student loans it's pretty clear that, in most cases, doing so will benefit you in the long run. If you're thinking in the short term and don't have a terminal illness, you're doing it wrong. Envision your future and you will probably find that consolidating your student loans is the best option for you.