Does a Student Loan Consolidation Help Your Credit Score?

Credit Score Anatomy

Several factors make up your credit score. Each affect your credit score by a certain percentage, which is determined by the national credit-reporting bureaus. Your payment history affects your total credit score by 35 percent. Your outstanding debt is responsible for 30 percent. The length of your credit history accounts for 15 percent. Recent inquiries about your credit affect your score by 10 percent. Finally, the types of credit on your credit report affect your total score by 10 percent.

Federal Student Loans

A college student who has only federal Stafford loans could face up to eight separate unsubsidized and subsidized federal loans upon graduation. These loans have no payment history when you graduate, which doesn't look very good on your credit score. Federal student loan consolidation can help your credit score in two ways: your payment history and the total number of open lines of credit. Consolidation effectively pays off your student loans and creates a single new loan. Now, you have a payment history showing you paid all those loans off, which elevates your credit score.

Private Student Loans

Private student loan companies are not required to offer you loan consolidation like companies holding federally secured student loans. Student loan consolidation from a private lender is largely based on your credit score, which may make consolidation right out of college difficult. You may be required to have a cosigner when first applying to consolidate private student loans. With timely payments on your consolidation loan, your lender may allow you to remove the cosigner and carry the loan on your credit alone.

Other Benefits of Loan Consolidation

In addition to helping your credit score, student loan consolidation has several other benefits. Consolidation often lowers your monthly student loan payment because it brings multiple repayment terms under one term of repayment. Loan consolidation also locks in the interest rate on all loans involved in the consolidation. The new rate is determined by taking the weighted average of all loans involved in the consolidation and applying that average to the new loan. This new rate can save a graduate thousands of dollars in fees and interest payments over the life of the loan.