September 30, 2021
If you’re applying for a private student loan, your credit score will have a large impact on whether you are approved for a loan, and if approved, what rate you will receive. A good credit score gives you access to lower interest rates which can save you money.
If you’d like to improve your credit score and are mystified by how credit scores work, keep reading!
Major credit score factors
Lenders use a wide variety of credit score models, such as the FICO or VantageScore models, and there are different versions of each of these. There are also three different credit bureaus (TransUnion, Experian, and Equifax), and your score can vary slightly depending on which bureau is reporting your score. Confusing, right?
Don’t worry! The major factors used to calculate your credit score are similar across the various models. Knowing which factors impact your score the most, can help you determine which steps you can take to improve your score.
Ready to improve your credit score! Let’s go!
1. Make on-time payments
Payment history is the largest factor in your credit score. If you’ve missed a payment in the past, it can stay on your credit score for up to seven years. The impact of late payments does will fade over time, until they finally drop from your credit report. While it is difficult to erase past late payments from your credit history, you can start building a new history of on-time payments today. Careful budgeting and setting up automated payments with your creditors can help you avoid missing payments. And the lower your score is, the more positive impact a record of on-time payments can help!
2. Pay down balances on revolving debt
Credit utilization also makes up a large component of your credit score. Using a high percentage of your credit card limit will negatively impact your credit score, even if you’re making on-time payments. If you’re not paying off the balance of credit cards monthly, try keeping your balances on credit card accounts to below 30% of their credit limits at all times. If you have extra money for paying more than the required monthly payment amounts, paying down revolving debt before installment loans can boost your credit score the most.
3. Pay down balances on installment loans
Credit scores can also be impacted based on how much of an installment loan (like an auto loan or home mortgage) is remaining. As the balance of these loans decreases, your score can improve. Keep in mind that your credit score may drop temporarily once these types of loans are paid in full, so if you’re considering applying for credit in the near future, it may be best to wait until after you’ve been approved before prematurely paying off other installment loans.
4. Keep older accounts open
The average age of your credit accounts is an important factor in determining your credit score. Even if you do not use your credit card, it’s normally best to leave the account open unless there are annual fees to maintain the account. Closing the account can lower the average age of your active credit accounts and temporarily lower your score. If the account is in good standing, it may take some time before the lender will automatically close the account for lack of usage. Periodically using the card for small purchases and then paying off the balance can help keep those valuable accounts open, helping to boost your score. If you plan on closing an older account that is in good standing and are considering applying for credit soon, wait until after you’ve applied for the new credit before closing other accounts.
5. Only use credit when you need it
Each time a hard credit inquiry is run to approve you for credit, your score is negatively impacted. Applying for multiple lines of credit results in multiple hard credit inquiries that can stay on your credit report for up to two years. The impact of hard inquiries is certainly less than missing a payment, and the negative impact fades with time.
6. Shop for loans quickly
If you’re shopping for the lowest interest rate for a major purchase, try to do so in a short time frame to reduce the impact to your credit score. Multiple hard credit inquiries within a short time frame (15-45 days) impact your score less severely. Soft credit inquiries, used by many lenders to prequalify you for a loan, do not affect your credit report or credit score, so use those where available when shopping for the best rate.
7. Get a copy of your credit report
One of the easiest ways to improve your score can be to remove any errors on your credit report. While rare, an error on your credit report can negatively impact your score. Without reviewing your credit report periodically, you may never know you’re being impacted. Accounts belonging to other people, incorrect accounts as a result of identity theft, and errors in addresses and phone numbers are the most common. But occasionally, accounts can be incorrectly reported as closed or delinquent, or may have the wrong balance. Cleaning up your credit report, if necessary, can improve your credit score.
Make sure you obtain a credit report from each of the credit bureaus (Transunion, Equifax, and Experian) as the information may be different for each. If you find an error on your credit report, it’s a good idea to contact both the lender reporting the incorrect information as well as the credit bureau reporting it.
You can get a free copy of your credit report from each of the credit bureaus once every 12 months, at AnnualCreditReport.com.
8. Monitor your credit score
Your credit report may or may not include your credit score. Fortunately, credit card lenders and banks are making at least one version of your credit score available to customers. Check to see if your banks or lenders offer a monthly score. If not, free services like Credit Karma (link) or Nerdwallet will provide you with a credit score based on one of the credit models. They can even automatically recommend specific advice based on your credit report.
Monitoring your credit score over time can help you get familiar with how your payment history and credit usage habits impact your specific credit situation. Even if these scores are not the same models lenders use, you can use them to track your progress over time to see the impact of your credit decisions and great payment history!
Brazos is part of a group of Texas nonprofit companies dedicated to college affordability. In fact, we’re one of the best kept secrets in Texas! We’ve been helping students and parents finance their college education since 1975, and our companies together are the largest nonprofit student loan group in the country! Helping make college affordable has been our mission for over 40 years!