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Understanding Your Credit

What is a Credit Score? 

A credit score is an objective measure of credit risk. It summarizes the information from your credit history into a single number. Your credit score is a measure of the likelihood that you will pay your debt as agreed. This forms a basis for comparing borrowers. Borrowers with higher credit scores are more likely to pay their debts on time and as agreed. The lower your credit score, the more likely you are to default on your debt. The most popular credit score is the FICO score developed by Fair Isaac Corporation. (The name 'FICO' is derived from the initials of the company name.)

FICO scores range from 300 to 850, with 850 being the best possible FICO score. Some credit reporting agencies are experimenting with a broader range of scores.

Generally, the FICO score depends on the following factors:

Score ComponentWeight
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%

The recency, frequency and severity of credit activity also has an impact.

How do Federal Direct Loan Student Loans use Credit Scores?

The Direct Loan (DL) Stafford, Perkins and DL PLUS loans do not depend on your credit score. The DL Stafford and Perkins loans are available entirely without regard to your credit history. The DL PLUS loan, however, requires that the borrower not have an adverse credit history. (Undergraduate borrowers whose parents are denied a DL PLUS loan will be eligible for increased unsubsidized DL Stafford loan limits.)

An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off. It does not otherwise involve your credit score.

How do Private Student Loans use Credit Scores?

Most lenders rely on your credit score to determine eligibility for private student loans. Your credit score can also affect the cost of your debt, with lower interest rates and fees reserved for borrowers with better credit scores. Education lenders generally use the FICO score in combination with other factors to determine eligibility for private student loans. The other criteria typically involve binary (yes/no) decisions, such as debt-to-income ratio and recent bankruptcies.

In most cases you will not be able to obtain a private student loan if you have a FICO score below about 630-650. Typically, more than two-thirds (85% to 95% by loan volume) of private student loan borrowers have credit scores of 650 or higher. 21% to 25% of borrowers have FICO scores of 760 or higher. (These figures are for private student loans only. The national distribution of FICO scores for all forms of credit is different.) The average FICO score is around 710.

Free Credit Reports

You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once a year. You can obtain these free credit reports from www.annualcreditreport.com. Call 1-877-FACT-ACT (1-877-322-8228) for more information.

Beware of sites with similar names that may charge you a fee for your credit reports or additional services.

FinAid recommends spacing out the free credit reports throughout the year, getting a report from just one of the credit reporting agencies each time, so that you're getting one report every four months.

You should check your credit report at least once a year, especially before any major credit applications such as obtaining a mortgage, auto loan or student loan.

The free credit reports do not necessarily include your credit score.

If you want to buy a copy of your credit reports, including your credit score, you can get it from each credit reporting agency directly. The major credit reporting agencies are:

You can also buy copies of your credit reports and FICO scores from Fair Isaacs at myFICO.com.

There will be slight variations in your FICO score at each credit reporting agency because your credit history at each agency is slightly different.

Improving Your Credit Score

There are no quick fixes to improving your credit score. Disputing all of the negative information in your credit report will not improve your score. If there is inaccurate information, you should certainly dispute it so that it can be corrected. But otherwise, don't dispute the information in the report indiscriminatively. Negative but accurate information will not be removed.

It is very easy to ruin a credit score, but it takes a long time to improve a bad credit score.

Here are a few good tips for improving your credit score:
  • Pay your bills on time and continue paying your bills on time. The number of accounts that are current and the length of time for which they are paid on time has a big impact on your credit score.
  • Paying off an account with negative information does not remove that information from your credit history. Only time can reduce the impact of the negative information, as older credit history doesn't count as much as more recent information. It is better to keep the account active, but to make regular payments as per the credit agreement. This provides positive information to help compensate for the negative information.
  • Do not close accounts that are current, even if you are no longer using them. The length of your credit history in an account has a positive impact, as does the number of accounts that show no late payments. It is more important to have accounts with positive history than to have no history because you have no accounts.
  • Minimize your use of revolving credit, such as credit cards and department store cards. Keep the balances low, and preferably pay off the balance in full at the end of the month. Installment loans (auto loans and mortgages) are a better form of debt.
  • Pay down installment loans, as the ratio of the current balance to the original balance is a measure of your ability to repay debt.
  • Don't max out your credit cards. If you use too much of your available credit, it can be a sign that you're overextended.
  • Avoid opening new accounts that you do not need. Opening too many accounts and the time since you last opened an account can affect your credit score.
  • Do not file for bankruptcy. A bankruptcy will affect your credit for 7 to 10 years.
  • When looking for a new installment loan, confine your inquiries to a short period of time. Generally, inquiries for a single type of financing within a 14 day period are considered to be a single event.

Requesting a copy of your credit report will not affect your credit score, nor will unsolicited inquiries from other companies. The credit score focuses on consumer-initiated inquiries that involve seeking and obtaining new credit.