Bad Credit

Your credit score is an indicator of how credit-worthy you are. When you take out a student loan, the lender is taking a risk. He is assuming that you will pay your debts, but cannot be sure, so the lender will review your credit score. People with high credit scores are not only more likely to be loaned the money, but they will also probably get an even better interest rate. Students with bad credit will have trouble being approved for a loan. If they are approved, the loan will carry a high interest rate. The high interest rate helps compensate the lender for the risk he is taking.

Bad credit will impact your student loan consolidation process. Federal student loans tend to be much more forgiving when it comes to bad credit. However, private student loans are not so forgiving. If your credit is terrible, you may have trouble consolidating your private loans. Why would a bank want to take a risk on you if your credit is terrible? Plus, your new fixed interest rate may be much higher than you want to pay.

Bad Credit and Federal Loans

You will be able to consolidate your federal loans, even if you have defaulted on these loans. This is quite generous, considering your shaky financial status. As long as you comply with one of the following conditions, the federal government is willing to give you a second chance:

  • Make arrangements with your loan provider to once again begin making satisfactory payments. Loan providers are willing to work with you because they want to make sure that they get paid. However, your credit score will be negatively impacted because you defaulted.
  • Agree to make repayments under the Income-Contingent Repayment Plan. This plan will adjust your monthly payments based on your loan balance and total income. You will need a Direct Loan to qualify.
  • Agree to make repayments under the Income-Based Repayment Plan. This is very similar to the Contingent Repayment Plan, but can be used for both Direct and FFELP Loans. People who work in low-paying fields will be eligible.

Your fixed interest rates will not skyrocket, even though your credit is not so great. When you consolidate your federal loans, your fixed interest rate is capped at 8.25%.

Bad Credit and Private Loans

Bad credit can spell trouble if you are trying to consolidate your private student loans. Unlike the federal consolidation process, your credit will be checked extensively. Banks want to make sure that you have the financial means to repay the money, and have a successful track record of paying your debts on time. They are not willing to give you second or third chances to prove that you can pay your bills on time. Some will flat-out deny your application. Other banks may be willing to take a risk on your finances, but will charge you for that risk. Prepare to be charged much higher interest rates.

If you have bad credit, you might want to consider adding a co-signer. Adding a co-signer can help boost your overall credit worthiness in the eyes of the bank. This co-signer will need to have significantly better credit than you do and be willing to pick up the payments if you end up defaulting on the loan. Parents or other family members are usually your best choice.

What Should You Do?

You probably know whether or not you have bad credit. You may have skipped rent payments, defaulted on an auto loan, or fallen behind on your student loan payments. However, you still need to check your credit report to make sure that there are not any errors or omissions. Contact the following credit bureaus to get your free reports: Equifax, Experian, or TransUnion, LLC.

Companies may be willing to give you a slightly better interest rate if you have shown improvement in your credit score. A percentage-point can make the difference between paying hundreds instead of thousands of dollars in added interest payments.