Default, Consolidation and credit

[Mauveboy]

Im sure this has been asked before, but is there a bump in your FICO score just from consolidating a loan that is currently in default? I have 4 Stafford loans, 3 of which where in default since September 2006, one that had been rehabed, and I've consilidated them into a Direct Loan. My current score is 636 will this go up once the defaulted loans are marked paid instead of actively in default and is the date when it will be removed from my credit report calculated 7.5 years from the 2006 date of default?

[Barris]

Yes, consolidating student loans will have a significant positive impact on your credit score because once the 4 loans are clubbed together into one large loan, it will of course attract a significantly lower monthly payment which in turn will also improve your DTI. And yes on the other question as well, you count 7.5 years from the DOFD, that is, 2006.

[Mauveboy]

All things being equal should I expect a 20-50 point jump or something even more signifigant? I'll be applying for an FHA loan so I'm not worried about approval once the default is paid. I'm just more curious as to how much it's dragging my score down.

[SCF]

If you want the greatest impact on your scores, you're going to want to rehab the remaining defaulted loans.  Consolidating the loans will close the current tradelines, remove the default notation, and open new ones for each TYPE of federal loan you had (for instance, one each for subsidized and unsubsidized).  Removing the default notation will have a small positive impact, and adding the new accounts will initially lower your Average Age of Accounts, but eventually have a larger positive impact as you pay them on time.

Rehab will remove the tradelines from the collection agency entirely, possibly remove all of your old lates, and create backdated new tradelines that may improve your AAoA ratther than dropping it.  If there is no way you can wait 9-12 months for the rehab process, consolidation is the way to go.  I wouldn't expect a 20-50 point increase immediately though.

[Mauveboy]

Thanks! My credit score was well within the range for an FHA loan though and I wanted to take advantage of the housing market sooner rather than later so I chose not to wait the 9-12 months to rehab. In 12 months the tradelines should come off my report any way as it will be 7.5 years from DoD. I'm hoping just not being actively delinquent and in default will open up oppurtuities for credit, any jump in score will just be gravy at that point.

[ecalmese]

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@Mauveboy wrote:

Thanks! My credit score was well within the range for an FHA loan though and I wanted to take advantage of the housing market sooner rather than later so I chose not to wait the 9-12 months to rehab. In 12 months the tradelines should come off my report any way as it will be 7.5 years from DoD. I'm hoping just not being actively delinquent and in default will open up oppurtuities for credit, any jump in score will just be gravy at that point.

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do you have any updates on credit bumps yet? keep me posted if you dont mind. im doing the same thing and hoping for the same results because in my case...my score is not high enough to get approved for a loan yet.

[Mauveboy]

So far I had a 10 point bump in my FICO score because the defaulted loans now carry a zero balance and I no longer have an active account in collections. The default notation will still be on until September when I expect the real increase will take place. It will also be interesting to see what happens when the new Sallie Mae loan is reported. It will lower my Average Age of Accounts, but not too much. In the mean time, the bump got me approved for an $11,000 car loan without a cosign which was the short term goal. Not a huge difference, but significant enough to matter.

[ecalmese]

It's nice to see some possible light at the end of the tunnel for me. I know the forum is very pro to the side of doing a loan rehab which makes total sense but i could not afford that so I went with a consolidation and I'm hoping that doesn't lead to several without anything positive reflecting from it.