Private Student Loans and Credit
A private student loan can be provided to you regardless of your financial need. A private student loan is credit-based, similar to a personal line of credit such as an auto loan or home loan. Since this is a credit-based loan, it's vital to know exactly where your credit stands. Here's a high level overview of credit, what it means, and how you can maintain or improve yours.
What is credit?
As defined by Merriam-Webster, credit is "the provision of money, goods, or services with the expectation of future payment"
What is credit history?
Your credit history is a record of how timely you are in paying back money you have borrowed. It's a record of all of your past borrowing behaviors and how you've repaid that money. It will show if you've ever had any late payments or if you've declared bankruptcy recently.
What is a credit score and how is your credit score calculated?
Credit scores are numerical indexes based on an algorithm developed by Fair Isaac Company, called a FICO® score. Scores are negatively impacted by events such as late payment, incomplete or partial payments, defaults, and judgments or liens, and range from 300 to 850. The actual algorithm is a trade secret of Fair Isaac, but the following breakdown approximates the weighted values that compose your score.Your credit is stored as a report and a score at the US's three credit bureaus: Experian, Equifax and Transunion.
Factors contributing to your credit score
- 35% Payment history
- 30% Outstanding debt
- 15% Length of your credit history
- 10% Recent inquiries on your credit report
- 10% Types of credit in use
Credit score ranges
According to FreeScore.com here's what your score will be considered as in the following ranges:
- 720 to 850-Excellent
- 680 to 719-Good
- 620 to 679-Average
- 580 to 619-Poor
The "average" credit score for "good" or "prime" credit is 675 or better for most firms, such as mortgage lenders. Scores lower than 625 are considered "subprime" and demand scrutiny, while scores lower than 600 will often be denied outright. Learn about student credit cards and your credit score.
How to get a copy of your credit report
Under the Fair Credit Reporting Act you are entitled to a free copy of your credit report from each of the three credit bureaus Experian, Equifax and Transunion every 12 months. To request your free annual report visit AnnualCreditReport.com or call 1-877-322-8228. AnnualCreditReport.com is the website set up by all of the three credit bureaus. It is the only site that is entitled to fill orders of the free annual credit report that you are entitled to by law.
There are numerous other sites out there that entice you to provide them with your information in exchange for your free credit report. While you may indeed receive a free credit report you may also receive promotional material and be asked to sign up for a service. Not all of these services are bad and many of them have helpful services such as credit report monitoring but you do want to make sure that you understand who you are giving your information to and how it will be used.
What is the required credit score for an private student loan?
Generally speaking, your private student loan application should be accompanied by a credit score of at least 675. However, if your score isn't that high don't panic, you still have options for getting a loan and you should still submit your loan applications. Each lender has different criteria and even if you have a poor credit score you can still get a loan using a cosigner. Things that will drastically reduce your chances of getting an private student loan include:
- Defaulted loans
- Payments overdue by 90 days or more
- Very high debt/income ratios
To ensure that you can obtain a private student loan for your education, it is essential to have a recent copy of your credit report and repair any delinquencies as thoroughly as possible.