Know your credit score for student loan applications
Most college students can tell you their grade-point averages, or at least come close. But there’s another number – a financial grade – they probably don’t know, but should.
That grade is a credit score, used by lenders and credit card companies to decide whether to lend you money and at what interest rate. Most look at the FICO score, created by the Fair Isaac Corporation of Minneapolis. Knowing your score will save you a lot of headaches and heartaches when applying for a student loan. Why? Because it will give you the information you need to inform you beforehand whether you are going to be approved for that loan or need a cosigner.
How is your credit score calculated?
FICO scores are calculated from a lot of different credit data in your credit report. The percentages in the chart reflect how important each of the categories is in determining your score. These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.
Your payment history makes up 35 percent of your score. The other main consideration is the amount owed, which accounts for 30 percent. The number of credit inquiries (although not ones you initiate) and number of new accounts makes up 10 percent of your score. So do types of credit and loans you have – a diverse mix of credit cards and loans for things like cars and student loans is best. The remaining 15 percent comes from the length of your credit history.
What is a credit score?
The scoring system awards points for each factor that can help predict the likelihood of a person repaying debts on time. The total number of points — the credit score — predicts how creditworthy a person is. The FICO score, a three-digit number between 300 and 850, is a snapshot of a person’s financial standing at a particular point in time. The higher a credit score, the more likely a person is to be approved for loans and receive favorable interest rates. You have the right to one free credit report from each of the three major credit bureaus every year through www.annualcreditreport.com.
Unfortunately, many young adults learn too late which behaviors lead to a rotten score – mainly paying bills late, opening a lot of credit cards and carrying too much debt. Credit industry experts estimate that roughly 75 percent of the U.S. population that is eligible for credit (i.e. 18 years or older) have a credit rating score at any given time that indicates the individuals’ credit worthiness to take out a student loan, mortgage, auto or apartment rental.
How is a credit score reported?
Your financial habits are monitored by one or more of the three national credit reporting agencies: Equifax, Experian, and TransUnion. Every month, financial institutions or creditors send the reporting agencies credit files which include consumers’ account numbers, types of credit (e.g. mortgages, credit card loans, and automobile loans), their outstanding balances, collection actions taken against them, and their bill payment histories.
More than 4.5 billion pieces of data are entered each month into credit records, which in turn become part of the more than 1 billion consumer credit reports issued annually in the United States.
These credit records also include information supplied by the consumer (primarily from filling out credit application forms), as well as public records such as bankruptcies, court judgments, overdue child support, foreclosures and liens. By law, credit bureaus can list negative information for seven years. Many national and international creditors, such as banks and department stores, are registered with all three credit agencies. Lenders supply the credit agencies with information about their customers and in turn have access to credit records. The best credit rates are given to people with scores above 770, but a score of 700 — out of a possible 850 — is considered good, according to Fair Isaac. The median score is about 725. Generic interest rate calculations show that when the score dips below the mid-600s, those consumers generally qualify only for “sub prime” lending and the interest rate starts to climb significantly. Don’t obsess about your exact score, especially if it’s above 700. You don’t need the equivalent of an A+ for your finances to be at the top of the class.
Will applying for a student loan hurt my credit score?
Each time you apply for a loan, whether it is a student loan, a car loan, a mortgage or other, the lender may request your credit report from one or all three credit reporting agencies. Each time an inquiry is made, it is noted on your report. Too many inquiries may have a negative impact on your credit score. However, most recently developed credit scores recognize when a consumer is shopping for the best rates and either ignore multiple inquiries or count them as only one inquiry if they occur within a specific period of time. In such cases, shopping around will have little or no impact on a credit score.