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Student Loans and Credit Scores

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With more than $1.7 trillion of student loan debt outstanding, but not a lot has been written about student loans. Not much has been written about the relationship between student loans and credit scores.

Why are there credit scores?

It’s not news that technology has replaced human interaction as the basis for getting a loan. Few remember going to a credit union or bank, meeting a loan officer who collected information and then made a decision whether to lend money or not.

As data and technology have developed, financial institutions are increasingly relying on faster processing, quantitative risk models and less personal interaction to make lending decisions. ​

Today, we apply online and, in many cases, get an instant decision based largely on a consumer’s credit score as calculated by one of the three national credit bureaus: Equifax, Experian and TransUnion. Each of these companies collects information about consumers and does a calculation that produces a number between 300 to 850, commonly referred to as a FICO score. Get your free credit score with the Federal Trade Commission. ​

It’s important to know that your credit score affects your ability to get a loan and it also helps determine the interest rate you will pay. Those with higher scores are judged to be more “credit worthy” (i.e. more likely to repay) and will be offered lower interest rates. Subsequently, those with lower credit scores will likely have a higher interest rate. ​

Credit scores are used to help consumers borrow money and then are influenced (i.e. they move up and down) based on a number of factors including how well a borrower pays off the debt.

What goes into a credit score determined?

There are several different credit scoring systems. The FICO® scoring system is one of the best-known scoring systems. It uses a scoring system from 300 to 850 and assigns a credit score based on the following:

These factors do affect a FICO score:

  1. Missed Payments: Missed payments have a negative impact on credit scores, build credit by paying your bills on time ​
  2. Revolving Utilization: The ratio of money used in a period to the amount of money available on the credit line.
  3. Length of Credit: How long you’ve been building credit ​
  4. Total Accounts: The variety of credit accounts open ​
  5. Inquiries: The number of times your credit score is reviewed or looked at by a third party

These factors do not affect a FICO score:

  1. Age, sex, marital status, race, color, religion
  2. Salary or Income
  3. Length or place of residence or employment
  4. Debt ratio: total debt divided by total assets