Stafford Loans Consolidation and Your Credit Rating
Did you know that Stafford Loan consolidation is beneficial to your credit rating? Consolidating your loans can help to improve your credit score by paying off your open Stafford Loan accounts. Before getting into why this is, here is a quick recap of some credit basics:
Credit Score Basics
Credit scores are numerical indexes based on an algorithm developed by Fair Isaac Company, called a FICO® score. Scores are negatively impacted by events such as late payment, incomplete or partial payments, defaults, and judgments or liens, and range from 300 to 900. The actual algorithm is a trade secret of Fair Isaac, but the following breakdown approximates the weighted values that compose your score.
- 35% Payment history
- 30% Outstanding debt
- 15% Length of your credit history
- 10% Recent inquiries on your credit report
- 10% Types of credit in use
Credit Scores and Stafford Loans
Stafford loan consolidation affects both your payment history and your outstanding debt, particularly in terms of number of loans outstanding. Federal Stafford loans are often issued in subsidized and unsubsidized loans, and new loans are issued each year. If you have only Stafford loans in college, you could graduate with 8 loans (4 subsidized Stafford loans, 4 unsubsidized Stafford loans) on your credit history, and those loans would have no payment information on them because you've made no payments (you were in school).
Credit Scores and Consolidation Loans
8 loans for 4 years with no payments doesn't look like responsible borrowing to a computer that processes credit scores. Remember - computers do the vast majority of credit decisions today, not living, breathing human beings.
If you consolidate, those 8 loans are paid off and one new consolidation loan is opened in your name. Now you have a payment record on those 8 loans - and they're all paid off. Again, to the computers of the world, this looks great! As a result, your credit score will increase when you consolidate.
Visit LoanConsolidation.ed.gov to consolidate your loans or for more information on the process.