One of the best ways to make a big difference in your FICO score is to consolidate your student loans. Your financial future may depend on your FICO score more than anything else. Just a few more points on your FICO score can save you tens of thousands of dollars over the course of your life by locking in low interest rates on houses, cars, and other things you buy on credit.
How FICO scores are made is explained.
A FICO score is based on a complicated algorithm that weighs different parts of your past and present financial situation to predict how good a credit risk you are likely to be in the future. Each factor is given a different amount of weight based on how important it is. Payment history accounts for 35% of the score, amount of debt for 30%, length of history for 10%, new credit for 10%, and types of credit for 10%.
Your FICO score goes up directly when you consolidate your student loans.
Because the amount of debt owed is the second most important factor (30%), lowering this amount can have a huge effect on your credit score. When deciding how much credit to give, lenders also look at how much debt a person has compared to how much money they make. When it comes to debt to income ratio, the lower monthly payments that come from consolidating a student loan can be very helpful, especially for people who are just starting out in their careers.
When a borrower refinances a student loan, they often save more than 50% on their monthly payments. For example, before refinancing, the payment on a $30,000 student loan is about $350. After consolidation, the average payment is about $166, which saves more than $2,200 per year.
By refinancing your student loans, you can indirectly raise your FICO score.
When it comes to money, the deck is already stacked against young adults who are just getting out of school and starting their lives, families, and jobs. In the years after college, most people rely on credit cards to help them make ends meet. But credit cards can be a source of stress and hurt your FICO score, especially if you can't pay off the balance right away.
By using the money saved from consolidating student loans in a different way, borrowers can pay off high-interest credit debts. Using the above example, putting $2,200 per year toward paying off high-interest credit card debt can add up to a lot. Over 5 years, you might have to pay back $11,000 in high-interest debt.
How the process of refinancing student loans works
Student loan refinancing works by first locking in a low fixed interest rate, which is different from how most government loans work, where the interest rate changes over time. After figuring out how much to pay back, the loan is spread out over a longer period of time, which makes the monthly payment less. There are no fees for paying off a consolidated student loan early, so borrowers can use the lower monthly payments to improve their FICO score and pay off high-interest debts early.
Benefits of getting a better FICO score
You shouldn't forget how a student loan consolidation affects your FICO score. One of the easiest ways to make a big difference in your score is to consolidate your student loans. Your financial future and the kind of life you can live will be affected by your ability to get credit at low interest rates. With a better FICO score, you can get higher credit limits, get loans faster, and spend less of your hard-earned money on interest payments.
