If you have any kind of credit, from a student loan to a department store credit card, you also have a “credit score.” A “credit score” gives future lenders, landlords, employers and others insight into how likely you are to pay your bills. Credit scores range from 300 to 850. The higher the number, the better your credit score. Your credit report includes, among other things, a summary of your payment history on loans and other bills. It is the information used to determine your credit score.
Understanding Your Credit Score
Your credit score is one of the most important keys to a healthy financial future. Your score can differ depending on which credit reporting agency provided the information, the scoring model, the type of loan product, and even the day when it was calculated.
Potential employers and landlords may pull your credit history to see how well you manage your bills. A high credit score shows you have a reliable payment history. Consumers with higher scores usually qualify for lower interest rates on loans such as car loans and mortgages. These lower rates can translate into substantial interest savings over time.
Low credit scores can have the opposite effect. Consumers with lower scores may find it difficult to qualify for loans and other credit products. If they do qualify, they may pay higher interest rates.
So, how is a credit score determined and how can your behavior impact whether your score is high or low? There are five components to a credit score: payment history, amounts owed, length of credit history, new credit and types of credit used. Each component’s weighting has an impact on your score.
Credit Bureau Reporting
Want to know what is on your credit report? Accessing your credit history is easy — and once per year it’s free, too. Request your free credit report from Experian, Equifax, or TransUnion at AnnualCreditReport.com.
The Fair Credit Reporting Act requires that reported information, such as a missed payment, must be accurate. If you happen to find an error on your credit report, you can dispute it directly (and for free!) with the credit reporting agencies. Beware of companies that claim they can fix your credit for a fee especially if they ask for the fee upfront.
Student loan servicers are required to report federal student loan payment status to the credit reporting agencies. A federal student loan delinquency usually is not reported to the credit reporting agencies until a payment has been missed for 90 days. Private student loan reporting can be earlier, such as after 45 days of non-payment. If you’re having trouble making payments on your federal student loans, this time is a great opportunity to enroll in an income-driven repayment plan before your loans report as delinquent. Most other debt reports after being 30 days late.
Many creditors are sympathetic to consumers who, due to inexperience with credit or a one-time event, may have missed payments or paid late. However, if the missed payment is reported accurately — that is if the payment was actually late — the current law doesn’t permit creditors to retract accurate information even as a one-time courtesy. Fortunately, student loan borrowers and consumers alike can build a good credit score over time with a few smart financial habits.
Four Habits to Build Good Credit
1. Don’t miss payments for outstanding debts. Delinquencies and defaults are a negative mark on your credit score and can take quite a long time — seven years in most cases — before it is no longer included in your credit history. Often you can sign up for automatic payments to ensure you don’t miss deadlines. Signing up for Auto Pay with your student loan servicer will usually qualify you for an interest rate reduction too.
2. Avoid maxing out your credit line. When you receive an established credit line, such as a credit card, many experts suggest limiting your credit utilization (the percentage of your credit limit you are currently using). Experts advise spending less than 10 percent to no more than 30 percent of your limit. This shows creditors and lenders that while you’re eligible to borrow more, you have the discipline to avoid using additional credit.
3. Create an emergency fund in case you encounter an unexpected expense like a car repair or other emergency. Even if you have a set-back, most creditors or lenders will require you to continue making payments as usual. An emergency savings will help you avoid using student loan deferment or forbearance should an unanticipated event arise.
4. Don’t wait until your credit is dinged to contact your student loan servicer for help. Contact your servicer as soon as you think you might fall behind on your payments. Your servicer may be able to help you explore a lower monthly payment or other option that will keep your student loan current until you’re back on your feet.
Understanding the basic principles of good credit habits, and the consequences of missed payments, can make it easier and less expensive when the time comes to rent an apartment, apply for a new job, buy a new car or even a house.
Brad Jones is the director of credit bureau management at Navient. Jones is also a member of the Student Loan Servicing Alliance credit reporting workgroup. This workgroup, formed in late 2014, frames recommendations for standardizing credit reporting of federal and private student loans and conveys such recommendations to the U.S. Department of Education, the Consumer Financial Protection Bureau and the Consumer Data Industry Association.