When you decide to apply for a new private student loan, or refinance your existing federal and private student loans, you can expect to have your credit history and credit score checked by the lender to ensure you are a good credit risk. By understanding what is in your credit report and what student loan lenders are looking for, you can proactively take steps to improve your credit health and raise your credit score.
What is Credit and How is it Reported?
If you have ever taken out a student loan, or have a credit card, you entered into an agreement to receive funds that must be paid back at a later date. Unlike credit cards, student loans, including student loan refinancing, are repaid in installments over a set number of payments, usually ranging from 5 to 25 years.
When you take out a student loan, most lenders or student loan servicers will notify at least one of the three major credit reporting agencies – Equifax, Experian, or TransUnion – so they can include the new account on your credit report as a trade line. Each trade line contains detailed information, including the account name and number, type of loan, date opened, original and current balance, payment status, and monthly payment required.
The lender or servicer notifies the credit agencies of all loan activity, including the payment date, how much of the payment goes towards principal and interest, and if the payments are on time. The credit agency records this information, which makes up part of your credit history.
Understanding Your Credit Report
While each credit reporting agency’s reporting format may be slightly different, they essentially include the same information:
- Personal Information, such as your name, address (current and previous), Social Security number, date of birth, and other information that identifies who you are.
- Credit History, including your open and closed accounts, original loan amounts, current balances, and payment history.
- Public Records, such as delinquent accounts, liens, and bankruptcies. Public records can remain on your credit report for many years, which will affect your ability to obtain future credit.
- Credit Inquires, which are placed on your credit report when you request credit. Credit inquires remain on your file for two years.
Tip: Federal law entitles you to a free copy of your credit report each year from all three of the credit reporting agencies. You should take advantage of this and check your report from each credit bureau annually to ensure your personal information is accurate and up to date. To get a free credit report, visit www.AnnualCreditReport.com or call 877-FACTACT. If something on your report looks inaccurate, be sure to contact the credit agency immediately to have it addressed. Unfortunately the credit reports will not include your credit score.
What Student Loan Lenders Look For When Checking Your Credit
When making a credit decision, private student loan lenders and those that refinance student loans will check your, and if applicable, your cosigner’s credit report and credit score to determine whether you are an acceptable risk and what interest rate they should charge you. Most lenders, like U-fi, will want to see an adequate credit history, a track record of making on-time payments, how much debt you have outstanding, and a good credit score. They will also ask you and/or your cosigner how much income you have so they can determine whether you, or your cosigner, have enough monthly income to make your monthly payments.
To increase your chances of being approved and receiving a low interest rate for a new student loan or a student refinance loan, you and/or your cosigner will want to have at least two open trade lines, be no more than 30 days past due on more than one account, and have no public records for the past five years. Most lenders will also want to see a good credit score. While each lender is different, if you have a credit score above 700, you will generally be considered a good credit risk.
Tip: When shopping for a private student loan or student refinance loan you should complete all your applications within a short window (e.g. 30 days), since multiple credit inquires within a brief time period will have little impact on your credit score.
How Does Your Credit History Affect Your Credit Score?
Your credit score is a number that summarizes your credit risk at any moment in time. While there are several types of credit scores, 90% of lending decisions use a FICO score, which is created by Fair Isaac Corporation. FICO scores range from a low of 300 to a high of 850, with higher being better. FICO scores are made up of the following:
- 35%: Payment History – have you made your past payments on time?
- 30%: Amount Owed – how much debt do you owe and how much of your available credit has been used?
- 15%: Length of Credit History – how long have you been using credit?
- 10%: New Credit – how much of your debt has been opened recently?
- 10%: Types of Credit Used – do you have different types of credit such as credit cards, installment loans, and mortgages?
Tip: FICO scores can change from month to month due to several factors. Not having too much debt, and making full payments on time, over a long period gives lenders more confidence you will repay them, increasing the likelihood they will extend you credit at a lower interest rate.
Understanding what is on your credit report and how it impacts your ability to obtain credit at a good rate is extremely important. If you notice something incorrect on your credit report, call the credit agency immediately and work with them to correct any problems. The better your credit history and higher your credit score, the more likely you will be approved for a loan and receive a low interest rate offer. At the end of the day, it could help you save a lot of money on your student loans and avail yourself to additional credit when you need it most.