Understanding Your Credit
What is a credit score?
- A credit score is a three-digit number that represents your creditworthiness, ranging from 300 to 850.
- The most widely used credit score is the FICO score, which is calculated based on your credit history, payment history, credit utilization, and credit mix.
- A good credit score is typically above 700, while a score above 750 is considered excellent.
- A credit score is used by lenders to determine the risk of lending you money and the interest rate you’ll be charged.
How is your credit score calculated?
- Credit scores are calculated based on information in your credit report, including payment history, credit utilization, and credit age.
- The three major credit reporting agencies use different algorithms to calculate credit scores.
- A good credit score is typically above 700, while a bad credit score is below 600.
- Understanding how your credit score is calculated can help you make informed decisions about your financial habits.
What’s in your credit report?
- Your credit report is a summary of your credit history.
- The three nationwide credit bureaus collect credit and other information about you.
- Your credit report includes information about your credit accounts, payment history, and credit inquiries.
- You can request a free copy of your credit report from each of the three credit-reporting bureaus once per year.
Building and Maintaining Good Credit
How to maintain your good credit
- Limit your accounts to avoid overspending and high credit utilization.
- Don’t close old accounts, as this can negatively impact your credit score.
- Use your accounts responsibly and pay your bills on time.
- Monitor your credit report regularly for errors and unauthorized activity.
Ways to improve your credit score
- Pay your bills on time to avoid late payments and negative marks on your credit report.
- Keep your credit utilization ratio below 30% to demonstrate responsible credit behavior.
- Monitor your credit report for errors and dispute any inaccuracies.
- Avoid applying for too many credit cards or loans in a short period, as this can negatively impact your credit score.
The 5 biggest factors that affect your credit
- Payment history carries the most weight in factors that affect your credit score, because it reveals whether you have a history of repaying funds that are loaned to you.
- The FICO Score 8 takes into account your credit utilization ratio, which measures how much debt you have compared to your available credit limits.
- Creditors like to see how long you have been using credit.
- Your FICO Score 8 considers how many new accounts you have.
- The final thing that the FICO formula considers in determining your credit score is whether you have a mix of different types of credit.
Credit Scores and Government Loans
What credit score is needed for government loans?
- Most federal student loans don’t require a credit score, but private student loans do.
- For private student loans, a credit score of at least 670 is usually required.
- Some lenders may have different credit score requirements.
How credit scores affect government loan interest rates
- When you apply for a private student loan, lenders review your credit score and history to assess how well you’ve managed money in the past.
- A good credit score indicates that you’ve done a good job managing debt and are likely to repay your loan.
- The higher your credit score, the better your approval odds and chances of qualifying for a lower rate.
Government loan options for bad credit
- Unlike many other forms of borrowing, it is possible to get a federal student loan even with a less-than-ideal credit score.
- Private student loans will consider your credit score for student loans as part of the approval process.
- If you intend to pursue private loans with a poor credit score, start by shopping around and looking for lenders that have more flexible credit score requirements.
Managing Your Credit
Check your credit report for errors
- Review your credit report from all three credit reporting agencies.
- Dispute inaccurate or missing information.
- Checking your own credit report has no impact on your credit score.
Pay bills on time
- Making payments on time is a major contributing factor to credit scores (35%).
- Pay bills on time to avoid delinquent payments and collections.
- Use payment reminders and automatic payments to stay on track.
Reduce the amount of debt you owe
- Keep credit utilization low (less than 30% of available credit).
- Pay off debt rather than moving it around.
- Don’t close unused credit cards or open new accounts unnecessarily.
Protecting Your Credit
Freezing your credit
- A credit freeze (or security freeze) is a free way to limit who can see your credit report.
- If you’re worried about someone using your credit without permission, you might want to place a freeze on your credit report.
Monitoring your credit report
- Because your credit report affects your ability to get loans, jobs, apartments, and more, you want to make sure there aren’t mistakes.
- You can do this in several ways: by checking your credit report regularly, getting free credit monitoring, or paying a company to do it for you.
Fixing mistakes in your credit report
- If you find mistakes on your credit report, both the credit bureau and the person, company, or organization that put the wrong information there are responsible for correcting it.
- But there are steps you need to take first: contact the credit bureau, and then contact the company that reported the wrong information.
Credit Score Requirements
What’s the credit score minimum for private student loans?
- Private student loans, including refinance loans, usually require a credit score of at least 670.
- Knowing the precise requirements is tricky because private lenders are not always forthcoming with this information.
- A credit score of at least 670 is usually required for private student loans.
Avoiding Common Credit Mistakes
How to avoid credit score mistakes
- Avoid applying for multiple credit products in a short period.
- Don’t close old accounts, as this can negatively impact your credit score.
- Use your accounts responsibly and pay your bills on time.
- Monitor your credit report regularly for errors and unauthorized activity.
Common credit score myths
- Credit scores are not affected by income or employment history.
- Credit scores are not affected by age or marital status.
- Credit scores are not affected by education level or occupation.
Credit score FAQs
- What is a good credit score?
- How is my credit score calculated?
- What’s in my credit report?
- How can I improve my credit score?
Government Loan Options
Alternative government loan options
- Federal student loans and cosigned private loans may be available.
- Some private lenders offer student loans for bad credit, but with higher interest rates.
- Consider alternative government loan options, such as income-driven repayment plans or loan forgiveness programs.
Long-Term Credit Management
How to maintain good credit over time
- Continue to use credit responsibly and pay your bills on time.
- Monitor your credit report regularly for errors and unauthorized activity.
- Avoid applying for multiple credit products in a short period.
- Keep credit utilization low (less than 30% of available credit).
Long-term credit management strategies
- Consider using a credit monitoring service to track changes in your credit report.
- Set up automatic payments to ensure timely payments.
- Avoid closing old accounts, as this can negatively impact your credit score.
- Use a credit score simulator to see how different credit actions may affect your score.