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Credit History and Student Loans

Many common student loan programs are not credit-based. Stafford and Perkins are based solely on need and don't even do credit checks. But not all will qualify and those programs will often cover less than 100% of the needed amount, especially considering the high cost of education today.

Many students and their families will, therefore, want to supplement those with credit-based student loans. When they do, being able to show a good credit report to evaluators will result in better access to funds, with the best possible interest rate.

As with any credit-based loan, a prior history of bad credit doesn't make getting funds impossible. But it can be much more difficult and often carries a higher interest rate.

Avoiding bad credit history can therefore be the difference between getting a loan or, if you do get one, repaying much more than you would have with good credit. But what is good or bad credit?

The first factor any loan officer will consider is the FICO score. The FICO is a number calculated by the major credit agencies based on a secret, proprietary formula. Though the exact equation isn't public, several criteria are known, and even obvious.

FICO scores are based on outstanding debt and defaults, number of late payments and how late - 30 days, 60 days, 90 days or longer, amount of credit available, number of recent credit inquiries and other factors. All these are weighed and weighted so that, for example, a default counts very heavily, as do any late payments, with larger late days counting more. The number of recent credit inquiries counts less.

Many students won't have a FICO score at all, not having credit cards or other forms of loan that would generate the data on which the score is based. But the majority of students are judged by the parents' credit history, in regard to granting loans. While student credit history is important, the parents income and credit history typically count for more in making a final decision.