Many students who want to take on student loans are confused about the link between credit score, repayment and consolidation. In truth, federal loans are rarely dependent on your credit score. However, if you have an excellent credit score, you may be able to get a lower interest rate on your private student loan, especially when consolidating.
How is Your Credit Score Calculated?
Credit scores are basically numerical proofs of your financial responsibility and they are the basis by which banks and other financial institutions decide the amount of credit they can safely give you without risking default.Your credit score is calculated on the basis of how consistently you pay your bills on time, the total amount of debt you owe, how long you have been on credit and how often you switch to or open up new credit lines. Different types of credit such as credit cards may also impact your credit score.
Student Loan and Credit Score
Like any other debt, your payment history will show up on your credit report; in fact, it may even be reported while you are still in college and not yet repaying the loan amount. However, most lenders will not take this into consideration if you apply for another loan since they are more interested in observing your repayment regularity rather than the borrowed amount alone.
If you have a pristine repayment history, your credit scores will improve, meaning that you will be more favored by lenders in the future should you need a loan for any purpose such as buying a car or starting a business of your own.
Credit Score and Loan Consolidation
Your credit score will have an impact on the loan consolidation details you negotiate with your servicer. In short, the better your credit score the lower will be your interest rate. You can improve your credit score by making sure your payments are on time. If you are facing a financial difficulty, you may want to look at options such as temporary forbearance that would in turn save your credit score.
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