Keeping Score: The Basics for Understanding - and Maintaining - Good Credit
Information compiled by the GradSchools.com team - last updated October 2010
Never underestimate the value of good credit. You'll need a good credit history to be approved for Federal PLUS Loans and for most private student loans as well as other forms of credit such as home mortgages, auto loans, and business loans.
When you apply for a Federal PLUS Loan, a private student loan or most other loans, the lending institution or creditor probably will request a copy of your credit report from an authorized credit reporting agency. This information, along with any other credit criteria, helps determine if you qualify for the loan, and if so, influence what you'll pay for the funds. Lenders also may request your credit score as part of the credit evaluation process (although scoring is not currently used to determine eligibility for a Federal PLUS Loan).
In this article, you'll find important information on credit, including details about credit history, credit reports, and credit scores. We'll also offer tips for maintaining - or repairing - your credit.
Most students today have already established a credit history. You have a credit history if you have at least one credit card, consumer loans such as auto loans, student loans, or any other form of personal credit. Credit histories are derived from repayment records reported by creditors and other organizations (including financial institutions, major retail store, and lenders to authorized credit reporting agencies, such as the three national credit bureaus: Equifax, Experian, and TransUnion.
Lenders examine your credit history to determine if credit should be extended to you. The fundamental issue for the lender is your "willingness to repay the loan," that is, the likelihood that you'll repay the loan on time based on your past credit performance.
Your credit report is a summary of your credit history. Just as your academic transcript is a history of the courses you've taken and how you've performed in those courses, your credit report can be viewed as your credit transcript because it lists the credit you have obtained (by individual account) and how well you've managed that credit.
Credit reports typically include information such as the type of debts you have, current balances, payment performance, available credit, and a record of credit inquiries in the past two years. Most credit account information remains on your credit report for up to seven years; bankruptcy, however, can remain for ten years.
You can obtain a free copy of your credit report at AnnualCreditReport.com. The three national credit reporting agencies, Equifax, Experian, and TransUnion have joined together to create this central online portal. From this Web site you can request a free copy of your credit report once every 12 months from each of these three agencies. You also are entitled to a free copy of your credit report any time you are denied credit. You simply need to contact the agency that provided the report that was used by the lender to make that credit decision.
Credit scoring is a quick, accurate, consistent, and objective method of determining the likelihood that you'll repay a future loan on time. The "credit score" is a numerical forecast that focuses on individual borrower behavior. It is based on the credit account information in your credit report. You want the highest possible score.
1. Factors that influence your credit score include:
2. Promptness in paying bills
3. Total debt
4. Amount owed on all credit card accounts
5. Age of credit accounts
6. Number of credit card accounts
7. Total available credit card limit
8. The proportion of credit card balances to total available credit card limit
9. Number of credit card accounts opened in the past 12 months
10. Number of finance accounts
11. Occurrence of negative factors such as serious delinquency, derogatory public records, collection accounts, bankruptcies, student loan defaults, and foreclosures
Although it's often a concern for student borrowers, having multiple student loans and/or a large amount of education debt does not necessarily mean you'll have a poor credit score. How well you've managed credit in the past is more important.
Credit score tips
The following credit tips can help you maintain the highest possible credit score.
1. Pay all your bills on time.
2. Minimize your credit card debt.
3. Avoid charging more than you can afford to repay when the bill is due.
4. Check your credit report at least once a year from each of the three national credit reporting agencies; promptly correct any errors that you find on your reports.
5. Limit the number of credit card accounts you maintain.
6. Be careful about opening new credit card accounts and closing older ones; it's beneficial to have the longest possible history regarding the age of your credit card accounts.
7. Notify your creditors immediately whenever your address changes.
Other credit criteria
In addition to the credit score, lenders may establish other criteria to determine if credit should be extended to a prospective borrower. These credit criteria, which may or may not be published by the lender, typically rely upon information supplied by the prospective borrower on his or her loan application, as well as upon data contained on the applicant's credit report.
Below are some examples of criteria that lenders may use to determine if credit should be extended to a prospective borrower:
1. Number of accounts rated 60 or more days delinquent
2. Number of accounts that have been delinquent 90 or more days
3. Declaration of bankruptcy
Tips for repairing your credit
These tips can help you repair damaged credit:
1. Make all payments on time, and make at least the minimum monthly payments.
2. Limit the number of credit card accounts you have, your total available credit on these accounts, and how much of the available credit you use.
3. Request a copy of your credit report at least once a year from each of the three national credit reporting agencies and check those reports for errors. Promptly clear up any errors that may appear on your report.
If you have been having credit difficulties, keep in mind that it takes time to rebuild good credit. You must demonstrate responsible credit behavior each day as you spend, and each month as you pay your bills.
Remember, your credit history is an important part of who you are financially. It will play an important role in determining how easily you'll be able to borrow the funds you'll need to accomplish your goals and how much you'll pay for those funds. So take care of your credit, because good credit's vital to your future success.
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