How to Get a Better Credit Score to Save on Private Student Loans
Improving your credit scores can help you qualify for a private student loan. It can also lead to a lower interest rate, saving you money.
Federal student loans do not depend on the borrower’s credit scores, but credit scores are needed for private student loans.
To qualify for a private student loan, you have to have a credit score of at least 650 or a creditworthy cosigner. A higher credit score increases your chances of being approved for the loan. Since 2009, there has been a shift toward credit scores of 720 and higher. The average credit score for private student loan borrowers and cosigners is 780.
Most private student loan lenders base interest rates on the credit scores of the borrower and cosigner, whichever is higher. Credit scores are grouped into 4-6 credit score ranges called tiers. The typical tier is about 50 points wide. Each tier is mapped to a different interest rate. Improvements in your credit scores can shift you into a better tier, leading to a lower interest rate.
Earnest, for example, has a minimum FICO score of 650, along with three years of a credit history and an income of at least $35,000 per year.
How to Improve Your Credit Scores
Your credit score is based on five key components. Addressing each of these components can improve your credit scores.
- Payment History (35%). Your payment history specifies whether you make your payments on time or late. Pay all of your debts on time, not just student loans. Being late with a single payment can cause your credit score to drop by 50 to 100 points. That’s enough to increase the interest rates you are offered on new private student loans.
If you have missed payments, bring those accounts current by paying the past-due amounts. Otherwise, you may lose an additional 10-15 points on your credit scores for being more than 30 days late. Late payments will hurt your credit scores for two years. Rehabilitating a defaulted federal student loan can improve your credit scores by removing the default from your credit history.
- Amounts Owed (30%). Your credit utilization increases each year you are in school, leading to a lower credit score and higher interest rates on new debt. Pay down your debt, especially credit card debt, to reduce your credit utilization ratio. Don’t close old, unused credit card accounts, as that increases the credit utilization, unless they charge and annual fee.
- Length of Credit History (15%). This is based on the average age of all accounts, as well as the age of the oldest account and the age of the newest account.
- Number of Inquiries (10%). Do not apply for new credit, as hard inquiries on your credit history can hurt your credit score. When looking for a new loan, try to shop around withing a short period of time, typically no more than a week or two. The credit reporting agencies can recognize shopping around behavior and count it as a single inquiry instead of several inquiries.
- Mix of Credit Types (10%). Credit types include credit cards, store cards and installment loans (auto loans, mortgages and student loans).
Experian Boost and UltraFICO can help you improve your credit scores by adding utility, rent and telephone bills to your credit history. Consumers give the credit reporting agencies permission to access their bank accounts so that they can identify payments of rent, utilities and telephone bills. These programs are especially useful to borrowers who have a thin credit history.
There are also a few ways to improve the likelihood of being approved for a private student loan that do not involve your credit scores, such as reducing your debt-to-income ratios and staying with your current job for longer.
Review Your Credit Reports for Errors
It is important to review your credit reports for errors periodically, especially before you apply for new credit, such as a private student loan or private refinance. Errors can affect your credit scores, which can affect approval for a private student loan and the interest rate you pay.
About a quarter of credit reports will have at least one error.
Look for inaccurate negative information, such as late payments and other derogatory information. If you are divorced, confirm that your former spouses’ debts are not reported on your credit history. Look for unknown accounts and bad debts that don’t belong to you. This could be a sign of identity theft.
How to Request a Free Credit Report
Before you apply for a private student loan, review your credit report for errors. Fixing mistakes can help raise your credit score and increase your chances of approval.
You can request a free credit report through annualcreditreport.com or by calling 1-877-322-8228. Do not contact the credit reporting agencies directly, as the credit reports are available for free only through this service.
The free credit reports do not currently include your credit scores, just your credit history. Some private student loan lenders and credit card issuers will provide your credit scores for free once a quarter. You can also obtain your credit scores through CreditKarma.com.
Requesting a free credit report does not affect your credit score.
The free credit reports are provided at no cost. Some of the credit reporting agencies will try to sell you additional services, such as access to your credit scores or credit monitoring. But, you do not need to accept these offers to obtain a copy of your credit report. You do not need to pay anything to get your credit reports.
Normally, you can obtain a copy of your credit reports from each of the three credit reporting agencies once per 12-month period. However, during the coronavirus pandemic, the credit reporting agencies are providing free weekly online credit reports through annualcreditreport.com until April 2021.
How to Correct Errors on Your Credit Reports
You can correct errors on your credit reports by disputing the erroneous information. Do so with each of the three credit reporting agencies. You can also file a dispute with the creditor that was the source of the incorrect information, but it is best to start with the credit reporting agencies.
The Fair Credit Reporting Act (FCRA) requires the credit reporting agencies to investigate a dispute within 30 days. If the credit bureaus cannot confirm the accuracy of the information, they must remove the erroneous information. The process typically takes 30-45 days, but can take up to 90 days.
The credit reporting agencies must send a notice of corrections to anyone who received your credit report within the past six months.
Wait until the incorrect information has been removed from your credit history before applying for a private student loan.
Disputes can be filed online at the web sites of each of the three credit reporting agencies.
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