October 21, 2019 By College Ave Student Loans
What is a Credit Score?
If you’re shopping around for private student loans, you’ve probably encountered inquiries about your “credit score.” Your credit score is a three-digit number that summarizes information about your credit history, which is available in your credit report.
To better understand how your credit history and credit report are used to calculate your credit score, let’s first address the question: What does a credit score mean?
What is a credit score?
A credit score is a calculation that indicates the likelihood that you will repay a loan in full and on time. In other words, your credit score is a “grade” for your “creditworthiness.”
This can affect not just the amount a creditor is willing to lend you, but your interest rate on that amount, which affects the total cost of your loan. For example, lower credit scores tend to receive higher interest rates, which means you’ll pay more in interest over the life of your loan.
What’s a good credit score?
Many companies can generate credit scores. Some of the most commonly known scores are FICO scores. FICO stands for Fair Isaac Corporation, the creators of the score, which has a range of 300 to 850 (with 850 representing the best and highest credit score).
A lower credit score suggests a greater risk that the individual will not fully repay the loan (or repay it on time), whereas a higher credit score suggests a stable financial situation and less risk.
Every lender using a credit score as a variable in their decision-making process will have their own set of criteria for assessing the level of risk they’re willing to tolerate when extending credit. For example, one lender might elect to issue loans only to individuals with a score higher than 700, whereas another lender might consider individuals with a score higher than 640.
How are credit scores calculated?
Your credit score is calculated using information in your credit report. This report includes your entire credit history – mortgages, car loans, student loans, credit cards – any type of credit that has ever been extended to you, and any payments related to that credit (missed, late, or on-time).
Overall, a good credit history paints a picture of stability. The longer you’ve been using credit responsibly, the better it is for your score. Likewise, an extended history of missed or late payments can hurt your credit score.
What’s the average credit score for a typical college student or high school graduate?
According to Credit Karma, the average credit score for people between the ages of 18 and 24 is 630. The average credit score for people between the ages of 25 and 34 is slightly lower at 628. As of the latest Credit Karma reporting, the first age group to break a credit score of 630 is between the ages of 45 and 54, with an average credit score of 646.
Why do I have a low credit score?
If you recently checked your credit score and found that it is low (or even nonexistent), you’re not alone. High school and college students typically have limited credit history due to their age.
It takes time to build your credit history and if you’ve never had a car loan, mortgage, credit card, or other form of credit, you won’t yet have a credit history and – as a result – a credit score.
How do I build up my credit history and score?
There are a few ways that you can establish a credit history and improve your score. One way is to have a parent or legal guardian with good credit cosign a loan or credit account with you. Even if you don’t use the account, you’ll start building credit history as payments are made on time. This is called “piggybacking,” and it should ideally be done using a family member or spouse’s credit account.
How can I get a private student loan with little or no credit history?
If you have a low credit score – or no credit score at all – it is unlikely that you will qualify for a private student loan on your own, but it doesn’t mean you can’t get one. It means you’ll probably need to find a cosigner.
A cosigner is an individual – usually a parent or legal guardian – who will sign the loan with you and take equal responsibility for it. Since your cosigner’s credit score can affect your interest rate, it’s wise to approach someone with a solid credit history.
Information about your loan will appear on both your and your cosigner’s credit reports, so keep in mind that any missed payments on your end could directly affect your cosigner’s good credit.
Can my credit score change?
Your credit score can change many times over. In fact, your credit score represents only the latest “snapshot” of information contained in your credit file at the time it was requested. Since your credit file is updated continually with new information, your credit score will fluctuate accordingly.
Your score could also change depending on which credit-reporting bureau is pulling the information. There are three national credit-reporting bureaus:
Each might not have the same exact credit information on file for you. As a result, credit scores pulled from each of the bureaus on the same day at the same time can differ.
Lenders usually work with one of the three bureaus to obtain your credit score when you apply for credit.
Maintaining your credit score
It is very important to understand, manage, and protect your credit score. Currently, you can request one free credit report per year from each of the main reporting bureaus. You might be charged for your actual three-digit score but reviewing your credit report regularly is free and it’s a good way to get ahead of errors and inconsistencies.
Just as it can take years to elevate your credit score, it can take many years to rebuild a damaged score, so the key is to make smart credit decisions early on. And don’t be intimidated by a low credit score! Start building your credit history early, make smart credit decisions, and watch your score grow.
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