For many young people, a student loan represents their first significant experience with borrowing, and with the complex world of credit and credit scores. It’s wise, then, for student loan seekers to follow a process for getting their loan that doesn’t adversely affect their tender new credit score. Use this guide to ensure the best years of your (or your kid’s) life don’t do any damage to credit scores.
Know The ABCs of Credit Scores
One paradox of obtaining credit is that part of the process of doing so can itself damage your credit score, if only a little. Anytime you apply for a new line of credit, or loan, the organization involved will do a credit check on you – these can be either “soft” or “hard” pulls. Better still, this kind of inquiry, a “soft pull,” has no impact on your credit score or credit history. A soft pull is in contrast with a “hard pull” which often comes from credit card companies and does impact scores. The rule is simple: student loan shopping can hurt your score, but it doesn’t need to. With a little preparation, you can make the grade without damaging your score. The key is to consolidate your stude
Keep Your Search Short
The rule is simple: student loan shopping can hurt your score, but it doesn’t need to. With a little preparation, you can make the grade without damaging your score. The key is to consolidate your student loan search within a narrow time frame. Why is this important? FICO explains, “In general, student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score.” Therefore, if you do your homework before shopping, you can get in and get out of the process fast enough to preserve your score.
Research as much as you can before clicking “apply.” Many students will find that a wealth of information is available online and over the phone. These resources will provide a good overview of what total costs you can expect. Moreover, most people have a good idea of their current score. By sharing this information informally with loan providers, they can clarify the costs within a dependable range.
Don’t know your score? No problem. You can check your credit score for free. The law entitles you to a free credit report once a year from each the three major reporting agencies (Transunion, Equifax, and Experian).
Know Who Is Searching
Sometimes the unexpected can lengthen the process of shopping for a student loan. Taking more time doesn't necessarily spell disaster for your score. The impact to your score may be minimal even if you don't lock down a loan within the 30-day window. If the credit checks are from educational lenders making hard pulls within a 45-day window, then the total activity will only register as one, single credit check rather than many. This feature is important because it limits the downside risk to your score.
This characteristic underscores the flexibility FICO permits those searching for student loans. Additionally, FICO can distinguish between credit checks for the purpose of a new line of credit and those that are for educational purposes. As a result, their calculation is friendlier to those interested in financing their education rather than those looking to boost their credit limit.
Skip The Credit Check Entirely
There are options for those who believe they’ll need more than 45 days and don’t want to suffer even one credit check. These students can start their research with loans requiring no credit pull of any kind. Federal student loans like Stafford and Perkins loans fit in this category.
Rather than focus on credit scores, these loans have more basic requirements including U.S. citizenship, having a SSN and a completed FAFSA application. These loans fit into two categories: subsidized and unsubsidized. The subsidized loans, which are awarded based on financial need, often feature low-interest rates. These loans are particularly attractive because the government will pay the accrued loan interest while the student is in school. Government backed PLUS loans work in a similar fashion. This loan choice will require a credit check, but the provider will only perform a soft pull thereby leaving your score intact.
Do The Math
There are many calculators available to students seeking loans. These online tools are an effective way to begin your educational, financial plan without a single credit check. By imputing some simple parameters, a shopper can get useful information before even speaking with a loan officer. Consider the hard or soft pull the final step in a process that begins with your research.
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