Many common student loan programs are not credit-based. Stafford and Perkins are based solely on need and not even do credit checks. But not all will qualify and these programs will often cover less than 100% of the amount needed, especially given the high cost of education today.
Many students and their families would therefore like to supplement them with credit-based student loans. When they do, to show a good credit report to evaluators will result in better access to funds with the best possible rate.
As with any credit-based loans, past history of bad credit does not mean it is impossible to get funds. But it can be very difficult and often results in a higher interest rate.
Avoiding bad credit history can mean the difference between getting a loan or if you get one, are paying much more than you would with good credit. But what is good or bad credit?
The first factor any loan officer will consider is the FICO score. The FICO is a number calculated by the major credit agencies based on a secret, patented formula. Although the exact equation is not public, several criteria are known, and even obvious.
FICO scores are based on debt and defaults, the number of late payments and how late – 30 days, 60 days, 90 days or longer, the amount of credit available, number of new credit inquiries and other factors. All these are weighed and weighted so that, for example, counts a standard very heavily, as do any late payments, with larger late days counting more. The number of recent studies have less credit.
Many students will not have a FICO score at all, not with credit cards or other loans that would generate the data on which the score is based. But the majority of students are assessed by their parents’ credit history, when it comes to granting loans. While student credit history is important, the parents’ income and credit history usually count for more in making a final decision.
Both sides have good credit. First and foremost, it means a FICO above 650, and the higher the better. After a score below that will not get a loan impossible, but it may need additional information that may affect the decision to activate offer. And to get the extra data in the hands of real people who may be affected is not easy.
Apart from the FICO score, and related to it, there are a number of factors that prospective borrowers should keep in mind.
Making payments on time is essential. Evidence of a history of late payments, incurring late payment are signs of a bad credit risk in the eyes of lenders. Staying within the available credit limits is important as well. Avoid the over the limit and other penalties shows a willingness to delay immediate gratification and take responsibility. Creditors are judging not just numbers, but character.
Limiting the number and maximum balance amount on credit cards, can also help. Excessive credit inquiries suggest to lenders that some have difficulty meeting current debt load. This is a signal that the repayment of additional loans can be difficult. This increases the lenders’ default rates – loans not repaid. Financial institutions will try very hard to keep that default rate low. To do so, they sometimes deny credit to borderline cases.
Meet all credit obligations and keep all borrowing to a modest level for a long time. That makes you look like a very good risk to loan officers, which means funding a student loan will be a slam dunk.
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