Let’s face it – understanding why their credit score matters are probably the last thing on a college student’s mind. But they must understand this. For many students, college is the first time in their life that they have the opportunity to incur debt. Student loans, auto loans, and credit cards are common forms of debt during this phase of life. This debt will impact their credit score and finances, either positively or negatively, for the rest of their life. In light of that, here are some credit score basics that every college student needs to know:
Student Loan Borrowing
If applying for student loans is their first time that they borrow money, this could be their first instance in establish a consumer credit history.
Here are the basics of this type of loan:
- Your loan status will be reported to the credit bureaus, especially if you fall behind on your payments or enter default status. These are three major credit bureaus: Experian, TransUnion and Equifax.
- While you are enrolled in school full time or eligible for a deferment status, the lender won’t calculate the interest on your account. Also, some loans will have their interest paid by the government while the borrower is in school or in a deferment period. We highly recommend you research these types of loans to see if you qualify. It’s like money in the bank.
- If you drop out of school or switch to part-time status, you will become responsible for the interest accruing on your subsidized and unsubsidized student loans. So make this decision thoughtfully.
- Interest will capitalize. While the initial interest rate on a student loan may seem low, such as six percent or lower, having the interest capitalize over time could add up to an amount much higher than you anticipated. You may leave college with disproportionately high percentage of your income going to repay your student loan debt.
- When you borrow a student loan, it will show as debt on your credit record until it is repaid. Defaulting on your student loans could result in wage garnishment, IRS tax refund offsets, and other legal consequences.
Credit Score Apps
Credit Card Debt and Your Score
- If you apply for a credit card, either through a financial institution or retail merchant, your credit score can be affected. Remember these points:
- Each time that you apply for credit it will lower your credit score by three points.
- Each credit card you obtain will have a maximum borrowing limit. And whatever balance you carry on those credit cards each month will show as debt on your credit report.
- When you apply for a home or a car loan, too much credit card debt will make your application look riskier. And that could result in a higher interest rate or even a loan denial.
Learning How Your Credit Score is Calculated
While you may need student loans to help pay for school, it’s easy to get overwhelmed with this type of debt. A credit score check helps you assess your current credit status, including the impact of student loan borrowing. We know student loans have low interest rates and are issued at a fixed rate, but they must be repaid. Each loan increases your debt-to-income ratio, leaving fewer options for borrowing related to housing, transportation, and credit cards. If you obtain a loan, you should learn how your credit score is calculated.
There are three sources of information that the credit bureaus will use to calculate your credit score:
Information obtained from creditors. These are details about your performance as a borrower as reported to the bureau by banks and credit card issuers. They report how much you have borrowed, how much you have repaid, what your interest rate is, and what your balance is. They also report when your payments are late, if they are sent to collections, and when they get charged off. Failing to maintain a good relationship with each creditor will hurt your score.
Information purchased from a third-party service like LexisNexis provides information on public records for each consumer, such as government tax liens, car accidents with self-reported claims, and bankruptcies.
Information obtained from the other bureaus. Every time you report a fraud alert, this information must be shared with the other two bureaus. Each credit bureau will stay in business and provide reliable information to creditors if it is sharing accurate data about you, the consumer who is seeking credit.
Credit Score Apps
Getting Started With a Credit Score Check
As a consumer, you can enroll in an online program such as Smart Credit to monitor your credit report and run a credit score check. You may be entitled to a free service like this through your credit card company. It’s important to verify that the information about each credit account is accurate, including the fact that you’re making your payments and that your balance is being reduced. This will improve your credit score.
Other factors can affect your credit score as well. Factors such as your three credit scores, how much you currently owe, whether your payments are on time, household income, and recurring payments such as rent, mortgage, and car payments.
In summary, lenders use your credit score to determine how much you can borrow and at what rate. The higher your credit score, the better terms you will get (and the less money you will pay over the life of the loan). So if you’re a college student or a parent of a college student and you’re reading this article – please take the time to understand your credit score basics. And best of luck in college!