Fortunately, not all student loan programs grant loans on the basis of your credit record, and loan schemes such as Stafford loans and Perkins Loans are based solely upon your financial need. Unfortunately, not all students will qualify for these loan schemes and those that do will find that the funds they provide are not enough to meet your needs and generally have to be topped up with additional loans.
For most students therefore there is a need for supplemental loans and that means credit-based student loans. And credit-based student loans means being able to demonstrate a good credit history in order to get the best interest rate and indeed, in many cases, to get a loan at all.
The first lesson that students need to learn therefore is that a bad credit history can make the difference between getting a loan and not getting a loan, or getting a loan on which you are going to have to pay a higher rate of interest than would have been necessary without a bad credit history.
When you apply for a loan the first thing that the loan officer is going to look at is your FICO score. This is a number calculated by the major credit agencies and the formula used for arriving at your FICO score is a closely guarded secret. However, there are certain factors that are known to affect your score, and these you do need to know about.
FICO scores reflect how well you have handled credit in the past and so look at how much credit has been made available to you, how much outstanding debt you have, and how good you have been at making payments on your credit agreements and loans. For example, if you have a credit card and have always made payments on time so that your account is up to date this will weigh in your favor. If, however, you have not always made payments on time and your account is in arrears then this will weigh against you and just heavily your FICO score will be affected will depend upon how many late payments you have made, how late those payments were and how much your account is now in arrears.
Now many students will not have a FICO score at all because they will not have had a credit card or taken out loans and so will have no credit history from which to calculate a FICO score. In this case, students are generally judged on the basis of their parents’ credit history when it comes to granting college loans. Indeed, even where a student does have a credit history of his own, the parents’ income and credit history are often taken into account and play an important part in any lending decision.
For both students and parents, building a good credit history and obtaining a high FICO score is important but there are some things which lenders tend to consider as more important than others. For example, many lenders consider late payment to be a particular problem and so they like to see a history of payments being made on time. They are also often nervous about borrowers who make too many inquiries about credit and of borrowers who have several credit cards, the majority of which are at or close to their maximum balance.
Against this background, you will see that you can considerably improve your chances of getting a student loan if you keep your overall borrowing down as low as possible and make sure that you always make repayments on time.