- Borrowed money that allows you to purchase things.
- The likelihood that you will pay back loans and be approved for new ones.
Credit score is an objective measure of credit risk, or the likelihood that you will pay your debt as agreed. The lower your credit score, the more likely you are to default on your debt. The higher your credit score, the lower risk you are to a lender. Your credit score is determined by the three credit agencies and helps lenders determine how much money you'll be able to borrow and what interest your loans will have.
Featured Credit Video
How to build a good credit score.
Free Annual Credit Report
AnnualCreditReport.com is the official site to help consumers obtain their free credit report.
This central site allows you to request a free credit report once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.
Student Debt vs Credit Score
With many students graduating college with significant college loans, it’s important they understand how this debt shapes their credit score and purchasing power in the future.
While having a significant amount of student loan debt may limit grads’ discretionary spending and force them to live on a tight budget as they work to pay it off, it doesn’t necessarily mean their credit history will suffer.
Credit Education Resources
myfico.com - Credit score and credit report education.
federalreserve.gov - Questions and answers to credit reports and scores
finaid.org - Basic explanations of credit and how it affects your ability to borrow a private student loan.
FTC.gov - Build a better credit report.
annualcreditreport.com - Request your free annual credit report.
Credit and the Graduate PLUS Loan
Graduate PLUS Loan Credit Check
Unlike the federal Direct Stafford Loan program, the federal Direct Graduate PLUS Loan requires a credit check as part of the application process. Your credit history affects your eligibility to borrow a a Graduate PLUS loan. You cannot have an adverse credit history if you wish to borrow a PLUS loan. You are considered to have an adverse credit history if you:
- Are 90 or more days delinquent on any debt, OR
- Within 5 years of the date of the credit report you have been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or writeoff of a federal student aid debt.
PLUS loan credit approval is valid for 90 days. Your credit is evaluated every time you request a new PLUS loan unless you have had a credit decision within the preceding 90 days.
In a nutshell, the PLUS loan credit check does not consider how much debt you have. It does consider your credit history in making timely payments to your debt.
Adverse Credit History
If you have an adverse credit history, you may still receive a Direct PLUS loan if you:
- Obtain an endorser who dooes not have an adverse credit history. An endorser (or co-signer) is someone who agrees to repay the loan if you do not repay it.
- Appeal the denial by contacting Federal Student Aid Applicant Services at 1-800-557-7394 to the satisfaction of the U.S. Department of Education that:
- The information causing the adverse credit decision is incorrect or has been corrected, OR
- There are extenuating circumstances relating to the adverse credit history. (Note that endorsers are not eligible for this option.)
Credit Score and Buying a Home
Whether you are borrowing a private student loan, applying for a credit card, or buying a home; lenders want to know the risk they are taking by lending you money. FICO scores are the credit scores that most lenders use to determine your credit risk. Your FICO credit scores (you have 1 score from each of the 3 major credit bureaus) can affect how much money a lender will lend you and at what interest rate and terms.
A higher credit score equates to a lower interest rate, which can save you tens of thousands of dollars when borrowing a loan.
For example, you have completed graduate school, are now working, and are applying for a home mortgage. You are applying for a 30-year, $250,000 mortgage where the lender charges the following interest rates to it borrowers:
Having a better credit score can equate to tens of thousands of dollars in savings when repaying a mortgage. In this example, if you apply for a mortgage with an average 660 credit score, you may pay ~$176,000 in interest over 30 years. If you apply for the same mortgage with a very good 720 credit score, you may pay ~$152,000 in interest. As you can see, a slight adjustment in interest rate can cost/save the borrower thousands of dollars!
Credit Score Criteria
Creditors and credit agencies look at three factors to determine your credit score. The factors are typically referred to as the three C's of credit:
- Character - How you've handled debt in the past (whether you pay bills on time, pay off lenders early, carry a balance month to month, etc.) tends to determine how you will handle it in the future. When reviewing your character related to credit, lenders look at payment history, lengths of credit history, and types of credit used.
- Capacity - Based on your income and other debt responsibilities (credit cards, car loans, mortgage, etc.), lenders determine whether you can afford an additional loan. They also take into account amounts owed on different accounts, how much available credit you have (or if you carry a balance over from month to month), new credit accounts, and how many lines of credit you've applied for recently.
- Collateral - As a borrower, you will often need to list collateral, or something of value (like a car, fine jewelry, or property), to secure repayment of the loan. If you cannot repay the loan, the creditor will seize your collateral as repayment.
Your credit score summarizes the information from your credit history into a single number. This forms a basis for comparing you to other borrowers. Borrowers with higher credit scores are more likely to pay their debts on time and as agreed.
The most popular credit score is the FICO score. FICO scores range from 300 to 850, with 850 being the best possible FICO score. A credit score below 650 is considered "subprime".
Generally, the FICO score depends on the following factors:
|Length of Credit History||15%|
|Types of Credit Used||10%|
For some people, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history. The recency, frequency, and severity of credit activity also have an impact.