Student Loans: How They Relate to Your Credit Score
Ignoring your student loans obligations and being delinquent will not only cost you more in the repayment of your loans but it will have a negative impact in your credit report. It could also prevent you from qualifying for a repayment plan. Once you resolve a delinquency by establishing an Income Based Repayment, Income Contingent Repayment or another repayment option, your credit rating will begin to recover
A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of the person. A credit score is primarily based on a credit report information typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques.
Credit influences many things that affect our daily lives, including our home and job. Your credit score will be looked at when you are applying to rent a house or apartment, when filing job applications, insurance shopping,opening new utility accounts or applying for additional student loans.
Understand Your Credit Score and How It Affects Your Insurance Policy
One factor in determining the premium of a personal auto policy has nothing to do with a person’s driving record—it’s your credit record. According to FICO, a software firm that measures consumer credit risk, approximately 95 percent of insurers use an applicant’s credit history—his or her insurance risk score—to slot him or her into a certain program.
When a person applies for auto insurance, the insurer asks for permission to pull his or her credit information. The insurer then secures a credit report from one or more of the credit bureaus—TransUnion, Experian, or Equifax.
Credit scores range from 300 to 850. If your score is below 650, you may have trouble getting insurance or you may have to pay a higher premium.
Your credit score commonly influences auto loan rates available to you. Most auto lenders do not fully review your credit reports and financial history; instead, they rely on your score and some basic application data. If you have a high credit score (750+), you will receive the best loan deals available (sometimes as low as 0%). However, even people with major credit issues can usually be approved for an auto loan, though at very high rates. The best auto loan rates are granted from online lenders and credit unions, not auto dealerships. It’s a good idea to limit the number of loans you apply for since inquiries from auto loan applications can lower your credit score.
Apartments & Rental History
Your credit report will typically be reviewed by a prospective landlord or rental agency. They are usually looking for a pattern of missed payments or other negative information on your credit report that indicate you may not be a responsible tenant. If you have bad credit, you may be required to put up a larger deposit or get a co-signer, or your rental housing application could even be turned down. In addition, each time your credit is reviewed it will create an inquiry that can affect your credit scores, so be careful about applying at several places at once.
Cell phone companies will check your credit score before deciding to grant you a service plan. People with credit issues may be asked to put down a large down payment or pay extra for a service contract. There are cell phone services available that do not require a credit check. Some contracts include terminology that allows the company to review your credit at any point. Be aware that a cell phone application inquiry will appear on your credit report and can lower your credit score.
If you are concerned about your credit score, you can always check on them with the three major credit reporting agencies. Before you do that, ask for a copy of your credit report from each of them. By law, you are allowed a free copy from these agencies each year. If there is information that is false, misleading or happened over a decade ago, then you need to look into having it changed or deleted as soon as you can.
Applying for a Job
Many companies check job applicants’ credit as part of the background check. Some also check credit histories when employees are considered for promotions, so you can’t assume that because you have a job at the company, your personal information is going to remain personal.
Unless your employer is located in one of the eight states that restrict employer-run credit checks in some way — California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont or Washington — there’s not much you can do about a credit check request other than refuse permission.
Find out what’s in your credit report before you start your job search. Obtain a copy of your credit report from each of the three credit services — Equifax, Experian and TransUnion — so you’re not blindsided by an inaccurate item that you don’t know about until an interviewer asks. Under an amendment to the Fair Credit Reporting Act, you can access your credit report for free once every 12 months.
If there’s a mistake on your report, contact the creditor that made the error, clear it up and ask that agency to report the mistake to the three agencies. If there’s adverse information about unpaid student loans, charge-card bills or bankruptcies on your report, don’t waste your time and money on credit repair schemes. You can’t erase the truth from your credit file. But time heals all wounds; most bad credit incidents will disappear from your record after seven years.
Get Your Story Straight
What can you say when you’re asked about poor credit? Your best bet is to keep your answer short, sweet and sincere. Acknowledge the error of your ways. Assure the employer that there was a one-time problem and you’ve changed. For instance, you might say: “I came from humble beginnings, and when I went away to college, I’d never had any experience with credit. I got overextended, and that was wrong, but I learned a lesson and worked hard to pay off all my debts. Since then, I’ve had clean credit and I hope this won’t hold me back, because I really want to work for your company.”
If you are turned down for a job because of credit problems, the employer has to give you a copy of the report and explain your rights under the Fair Credit Reporting Act.
Repaying Student Loans
Resolve any delinquency immediately. Ignoring your student loans obligations and being delinquent will not only cost you more in the repayment of your loans but it will have a negative impact in your credit report. it could also prevent you from qualifying for a repayment plan. Once you resolve a delinquency by establishing an Income Based Repayment, Income Contingent Repayment or another repayment option, your credit rating will begin to recover.
Student loans taken out with a private lender have fewer repayment options than a federal student loan. Despite this, most banks will work with you to help them selves to keep “bad loans’ off their books. It is very important to notify your lender before you miss a payment and to set up a new repayment plan. If it is too late for that, then you will need to establish a new repayment plan quickly and follow up with the lender and the credit reporting agencies to make sure any delinquent information has been updated to reflect that a repayment plan is now in place and that you are current with your loan payments.
A student loan in deferment or forbearance will NOT hurt your credit score. Payments are not required when a loan is deferred If you need a short term of relief from a student loan to get your finances back on track or to deal with an unexpected expense such as an extended hospital stay, then this is definitely an option for you.
Federal Student Loan Advantages
Unlike private lenders, federal student loan lenders do not report past due accounts until they are 60 days past due and even then until the end of that month. This provides a federal student loan holder additional time to pursue repayment options or request deferment for the loan.
When deferment is granted, federal student loan lenders report it to the credit agencies automatically; in some cases, they will even backdate it if appropriate. As an example; if you return to school to pursue another degree, but did not file the appropriate notification paperwork, the period for which your loan was delinquent can be removed from your credit history once everything has been filed correctly.