 You probably know that consolidating student loans can greatly lower your monthly payments. But many borrowers don’t even imagine how large impact consolidating student loans can have on their FICO score. One of the most efficient ways to quickly improve your FICO score is consolidating student loans. In turn you can save a great deal of money on future big ticket credit purchases like cars and homes.
The anatomy of a FICO score
A FICO score is derived from giving a numerical value to various elements of creditworthiness and running those numbers through a complex algorithm. The score takes into account your current and past financial situation in order to make a prediction about how likely you are to pay your bills on time in the future. Each credit-worthiness element is weighted according to its importance:
35% - Payment history
30% - Amount of debt owed
10% - Length of credit history
10% - Types of current credit
15% - Miscellaneous
The direct impact of consolidating student loans on your credit
The first way that consolidating student loans positively influences your FICO score is by closing all of the open student loans and replacing them with one, predictable, fixed interest loan. Lowering the amount owed can make a large influence on your overall score, because the amount of debt owed is a highly ranked factor. Lenders most certainly consider debt to income ratio when determining if you can comfortably take on a new payment. Your debt to income ratio can be significantly reduced, because consolidating student loans can lower your monthly student payment by up to 60%.
If a graduate with a $30,000 debt pays around $313 per month before refinancing, after consolidating student loans, he/she will pay nearly $106 every month. It will free up an additional $207 per month. When taking into account the purchase of a new vehicle with a $300 monthly payment, having an extra $200 a month in disposable income can be a decisive factor on whether or not you can secure the auto loan at a favorable interest rate.
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