When it comes to student loans, your credit score may not always determine your ability to borrow, especially for federal student loans. The application process for federal student loans does not involve a credit check, except for Direct PLUS loans for graduate and professional students and parents of undergraduate students.
On the other hand, private student loan lenders, such as banks and credit unions, typically require a credit score of at least 670. The specific qualification requirements may vary slightly among different lenders. Having a higher credit score increases your chances of qualifying for a loan and obtaining a competitive interest rate.
What Credit Score Do You Need for Federal Student Loans?
Federal student loans do not have specific credit score requirements, which makes sense considering that many college students have yet to establish credit histories.
The only federal loan type that checks your credit history is federal PLUS loans. However, there are no minimum credit score requirements for these loans. Individuals with less-than-ideal credit history may need to meet additional requirements to get approved.
An advantage of federal loans is that they allow most students to receive funding when needed. The interest rate and terms of federal loans are the same for all borrowers, so having a poor credit score does not affect your loan rate or terms.
What Credit Score Do You Need for Private Student Loans?
While federal loans generally offer better terms, some individuals turn to private lenders for additional funding. Private student loans, including refinance loans, usually require a credit score of at least 670. However, it can be challenging to determine the precise requirements as private lenders tend to keep their credit score guidelines as trade secrets. The only way to find out if you qualify is to apply.
Some lenders offer prequalification, which allows you to check if you are eligible for a student loan without them pulling a hard credit check. This is beneficial as hard credit checks can negatively impact your credit score. Take advantage of prequalification offers when exploring options with private lenders.
What is Considered a Good Credit Score?
FICO, one of the prominent credit-scoring models in the U.S., defines a “good credit” as a FICO Score between 670 and 739. Scores above that range are considered very good or exceptional.
The complete range of FICO credit scores includes the following:
- Under 580 – Poor
- 580-669 – Fair
- 670-739 – Good
- 740-799 – Very good
- 800 and above – Exceptional
A credit score indicates how responsible you are with borrowed money. It is based on factors such as your debt-to-income ratio, the number of accounts you manage, and your payment history.
For instance, FICO uses five key factors to calculate your score. Your payment history accounts for 35% of your score, amounts owed make up 30%, the length of your credit history is 15%, and new credit and credit mix account for 10% each.
Lenders consider these factors, along with your raw credit score, when evaluating loan applications. Therefore, having a good credit score alone may not be sufficient to qualify for a loan. However, having a score above 670 gives you the best chance of qualifying.
Can You Get a Student Loan with Bad Credit?
Most federal loans (excluding PLUS loans) are available without credit checks, so a less-than-perfect credit history is not a barrier. However, if you are applying for private loans, your credit score will come into play.
If you have bad credit, having a parent co-sign the loan can help. In this scenario, the lender assesses both your credit history and your co-signer’s credit history, potentially reducing your interest rate. The downside is that the co-signer shares responsibility for the loan, and their credit may be affected if they fail to make payments.
If your credit score is in the mid-600s or lower, having a co-signer may be necessary. However, you can also explore options with private student loan lenders that specialize in serving borrowers with bad credit. Just be prepared for higher interest rates.
While your credit score may not impact your eligibility for most federal student loans, private lenders consider credit history as part of the application process. If you plan to apply for a private student loan and have less-than-ideal credit, consider finding a cosigner with a better credit profile. If you don’t need a private loan immediately, focus on improving your credit score before applying to qualify for the most competitive interest rate.
Frequently Asked Questions
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Do student loans help build credit?