How a Student Loan Consolidation Increases your FICO Score
The Basis for Credit Ratings
If you currently have outstanding balances on several Stafford loans, then a student loan consolidation of the loans can help increase your FICO rating. Credit scores are based on a complex algorithm that was created by the Fair Isaac Company – thus the name FICO, and determine the ability of a person to pay back a loan. The calculation is made based on what credit report information is reported by creditors to the three credit bureaus, or Experian, Equifax, and TransUnion.
The Importance of Maintaining a High FICO Score
In turn, banks and lenders look at the scores to analyze and decide the amount of risk associated with lending money to a prospective borrower. FICO scores that fall in a range of 720 or above are considered excellent while 675 to 719 is considered good. If your score hovers between 620 and 674, it is classified as below average, and a score of 620 or below is generally thought of as bad or considered subprime. As a result, borrowers with higher FICO scores obtain lower interest loans while the lower scores qualify for higher-interest financing. Therefore, it obviously is in your best interest (no pun intended) to maintain a good FICO rating.
Gauging Risk
Negative items that can adversely impact a score include collections, charge-offs, liens, foreclosures, bankruptcies, repossessions, and late payments. The amount of inquiries for credit can also lower your score as lenders see such inquiries as a means for a borrower to obtain money when he is experiencing some financial hardship. Therefore, technically, the FICO score determines the amount of risk for default, or gauges the chance that an account will fall delinquent past the 90-day mark.
The Criteria for Determining Scores
Credit scores are based on weighted averages consisting of one’s payment history, outstanding debt, length of credit history, recent inquiries, and the types of credit used by the borrower. Therefore, a student loan consolidation of your Stafford loans will impact the history on your report as well as the amount of outstanding debt.
How you can Raise your Score
For example, because you made no payments while you were attending college, then, of course, no payment history is shown on your credit report. However, if you, say, have three or more loans and consolidate them, then the transactions will show up on your credit report as paid-in-full on not one, but all of the loans – proof to lenders that you can meet their criteria for staying out of debt and making timely payments.
A Benefit Worth Considering
Plus, if you keep making the payments on your student consolidated loan, you certainly will increase your borrowing power. So, while your Stafford loans may come with a number of benefits, consolidation gives you the opportunity to improve your credit ranking and raise your financial standing in the eyes of a lender.
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