Loans Fair credit

2014 ABF Annual Christmas Eve

Your credit score is a measure of the likelihood that you will pay your debt as agreed. The lower your credit score, the more likely you are to default on your debt. Borrowers with higher credit scores represent a lower risk to the lender.

Most lenders rely on your credit score to determine eligibility for private student loans. Your credit score can also affect the cost of your debt, with lower interest rates and fees reserved for borrowers with better credit scores. This is in contrast to federal education loans, which generally do not depend on your credit score.

What is a Credit Score?

A credit score is an objective measure of credit risk. It summarizes the information from your credit history into a single number. This forms a basis for comparing borrowers. The most popular credit score is the FICO score developed by Fair Isaac Corporation. (The name 'FICO' is derived from the initials of the company name.)


FICO scores range from 300 to 850, with 850 being the best possible FICO score. Some credit reporting agencies are experimenting with a broader range of scores. A credit score less than 650 is considered "subprime".

Generally, the FICO score depends on the following factors:

Score Component Weight
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used

The recency, frequency and severity of credit activity also have an impact.

How do Federal Student Loans use Credit Scores?

The Stafford, Perkins and PLUS loans do not depend on your credit score. The Stafford and Perkins loans are available entirely without regard to your credit history. The PLUS loan, however, requires that the borrower not have an adverse credit history.

An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.

How do Private Student Loans use Credit Scores?

Education lenders generally use the FICO score in combination with other factors to determine eligibility for private student loans. The other criteria typically involve binary (yes/no) decisions, such as debt-to-income ratio and recent bankruptcies.

Most education lenders break their interest rates and fees into five tiers, based on the borrower's credit score. About 20% of the borrowers get the best rate, followed by 35%, 20%, 10% and 15%. Each tier has an interest rate that is 1% or 2% higher than the previous tier. This means that borrowers with the worst credit scores can have interest rates that are 5% to 6% higher than the interest rates charged to borrowers with excellent credit. The fees are also higher by as much as 9%, although some lenders roll higher fees into the interest rates.

This means that borrowers with bad credit scores may have monthly payments that are 20% to 40% higher and pay two-thirds to 100% more interest over the lifetime of the loan as borrowers with excellent credit scores. That's as much as double the interest!

If you have a bad credit score, a cosigner with a good credit score can make you eligible for a private student loan. Even if you have a good credit score, a cosigner with a better credit score can potentially reduce the interest rate and fees you'll have to pay on the loan. This is because most lenders use the better of the two credit scores to determine eligibility and the cost of credit.

Another method of getting a better interest rate is to agree to make payments on the loan while you are in school. Many lenders give better rates for borrowers to begin repayment immediately or make interest-only payments during the in-school period.

If you are denied a private student loan, ask the lender about their appeals process. Sometimes they will make an exception if an unusual circumstance lead to the denial, especially if the negative event is not likely to occur again. Appeals will also be accepted if the denial was the result of inaccurate information on your credit report that was subsequently corrected.

Interesting facts

  • The United Kingdom's Financial Ombudsman Service is an ombudsman established in 2001 as a result of the Financial Services and Markets Act 2000 to help settle disputes between consumers and UK-based businesses providing financial services, such as banks, building societies, insurance companies, investment firms, financial advisers and finance...
  • In United States agricultural policy, additional peanuts (or additionals) refers to peanuts sold from a farm in any marketing year in excess of the amount of quota peanuts (see peanut poundage quota) sold from that farm. Additional peanuts must be exported or crushed into oil and meal. Additionals are eligible only for the lower of two price...

Additional information

Anil Stocker - Monetising Invoices and Fair Loans
Anil Stocker - Monetising Invoices and Fair Loans ...
Loan Portfolio Hedging Under the Fair Value Option
Loan Portfolio Hedging Under the Fair Value Option
Newcastle Access to Fair Credit campaign
Newcastle Access to Fair Credit campaign
THL Credit Senior Loan Fund Celebrates Listing on the NYSE
THL Credit Senior Loan Fund Celebrates Listing on the NYSE
No Credit Car Loan
No Credit Car Loan
The Color of Credit: Mortgage Discrimination, Research Methodology, and Fair-Lending Enforcement: Mortgage Discrimination, Research Methodology and Fair-lending Enforcement
eBooks (The MIT Press)

Popular Q&A

What are the benefits of interest free loans?

Allows you to buy a more expensive house, with much smaller monthly payment. You also don't have to pay principal loans. Also helps you save up money.

what are interest free loans? | Yahoo Answers

Someone loans you $1,000. They ask you to pay them back in 10 payments of $100. After the 10th payment, the loan is paid in full. It was a real loan but they didn't charge you interest. It is "interest-free"..