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Your Financial Life
By Transamerica / Aug 24, 2015

How a High FICO® Score Can Help Your Higher Education



In April, our three-part series on FICO® scores began by explaining exactly what a FICO® score is; later in May and June, we touched on how you can repair a low FICO score, then maintain your score once you raise it to a solid number. But what if you are a college student? How can your FICO score affect your ability to receive a private loan for the school of your choice?

These are important questions, so read on for a refresher on what a FICO score is, and how it can have a direct bearing on your college career.

What is a FICO score?

Do you have an outstanding loan you’re in the process of paying back? Do you have a credit card that holds a balance? An open line of credit means you have a FICO credit score. Established in 1956, a FICO score measures your credit risk and provides lenders with a rank that describes how likely you are to pay back a loan. The FICO score is designed to provide a fast, comprehensive, and fair manner in which a borrower’s credit history can be examined without bias by lenders. The range of the FICO score is 300 at its lowest point, to 850 at its highest.

With 90% of lenders using FICO scores, it’s important to keep in mind that your score can highly impact how much money you are qualified to borrow on a loan, and what the interest rate will be on the loan. Your overall FICO score is determined by the following factors based on their percentage of importance.

  • Your payment history is 35% of your score.
  • The amount of money you owe other lenders, as well as how close you are to paying off what you owe is 30% of your score.
  • The length of your credit history determines another 15%.
  • Whether you have shown an ability to manage a variety of credit types, such as student, business or car loans is 10%.
  • If you have recently applied for a loan equals the final 10% of your score.

Lastly, FICO scores are generated from one of three credit reporting bureaus:

  • Equifax
  • TransUnion
  • Experian

How can my FICO score affect my college career?

If your college education requires that you borrow money for tuition, room and board, or books and other school materials, you will need a good FICO score. Most lenders like to see a FICO score of no less than 720 for those requesting college loans. But having a score of 760 to 850 helps you even more, because you will be able to borrow money at a lower interest rate.

Keep in mind that this information applies only to private student loans. Federal loans like the Stafford, Perkins and PLUS loans do not depend on your credit score. The Stafford and Perkins loans are available without regard to your credit history.

What if my FICO score is low?

A lower FICO score doesn’t necessarily mean you won’t be able to borrow money. You just need to know that your interest rates might be higher. To help lower your interest rate, you should try to pay down your debt, avoid carrying a balance on your credit cards, and don’t apply for new credit cards or additional loans. If these three tactics don’t raise your FICO score enough to satisfy potential lenders, you may have to get a cosigner, such as your parents, for your college loan.

What if I don’t have a credit history?

If you have no credit history, you most certainly need to start one. FICO scores can also work against you if you don’t have a credit history, as a lender will not know historically if you are able to pay back a loan. The first step toward establishing a credit history is to apply for and open a credit card. Charge small amounts using your card, particularly if the card has a high annual percentage rate (APR). APR is the amount of interest you pay on top of your actual credit card debt. To avoid the accumulation of interest, make sure you pay the card’s full balance each month. A history of making your payments on time, and not maxing out your available credit will help you establish a good FICO score.

A strong FICO score isn’t just important for people who are buying houses and cars. It is also important for prospective students who seek private loans to pay for their education. Whether you have a credit history or you are just starting to establish one, build and maintain your score by steadily managing your debt and using your credit wisely.