The increase in the cost of education requires many students to borrow loan funds or obtain credit to finance their education. This section will describe how Federal and Alternative Student loans affect your credit, give you information about your credit report, credit score and provide tips you can use to maintain good credit.
    
                    

Student Loans

There are two types of student loans: Federal Loans and Alternative Loans

Federal Student Loans

Although Federal Stafford and Perkins Loans are not based upon your credit history or income, the amount you borrow to pay for your cost of education is reflected on your credit report. If you default or fail to make your scheduled payments on your student loans it will negatively affect your credit score.

The Federal Graduate PLUS Loan, available to Graduate and Professional students, is not based on your FICO score but does require that you have no adverse credit.

Alternative Loans

Alternative Education loans are private loan programs offered through banks for the purpose of supplementing a student's financial aid package. They are not federally endorsed or guaranteed, but they must be certified by the college Financial Aid Office. Alternative Loans are based on creditworthiness, so the initial step in applying is a credit check with the lender.

Since an Alternative Loan is based on a credit check, we recommend you obtain a copy of your credit report to make sure that there are no errors on your credit report as it may take months to correct your report. We also recommend you apply for Alternative Loans at least 3 months before you need the funds. This will allow for processing time and time enough for you to correct any errors you may find on your credit report.

When applying for an Alternative Education Loan, make sure you are aware of what the loan will cost you once you are in repayment. Alternative Education loans are products of an individual bank, so, the interest rate and repayment period may vary. Shop around for the best Alternative Education Loan that will meet your individual needs. However, only apply to one lender that you want to obtain credit/loan funds from. Too many inquiries on your credit report can negatively affect your credit score. Use this calculator to get an idea of what your monthly payment and total loan repayment may be.

Credit

What is a credit check?

A credit check is an inquiry to your credit report to confirm your credit payment history. It is possible to check your creditworthiness to ensure that you have the means to pay for goods or services that a business has been requested to supply.

What is a credit report?

A credit report is based on your credit history e.g. whether or not you have paid your bills on time. This information includes monthly credit card and loan payment information.

Your credit report also includes:

Who you are. This includes your name, address and previous addresses, marital status, social security number and date of birth.

Your credit. This includes who gave you credit, how much credit was given, when the credit was given and how much you paid, how often and if you paid on time.

Public record. This includes any court action that has been taken against you for unpaid bills, tax liens or bankruptcy filings.

Inquiries. This is a list of parties that have accessed or inquired about your credit report. This may include employers, current and prospective, agencies- you have sought credit from and solicitation lenders.

What is a credit score?

A credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It's the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

How is my credit score calculated?

The scoring method most commonly used by banks and lending institutions is the FICO (Fair Isaac and Company) scoring method. The scoring method uses the information on your credit report and weighs each item according to importance in order to come up with a final single number score. The number can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac and Company.

According to www.howstuffworks.com, here is an approximate breakdown of how a credit score is determined:

• 35% of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

• 30% of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.

• 15% of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

• 10% of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year. (Solicitation inquires are on your credit report but do not effect your score.)

• 10% of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the score.

Tips to maintain a good credit report

1. Obtain a copy of your credit report.

You can obtain a free credit report from each of the three credit reporting agencies once a year.

Tip: Your report may be different from one agency to the other. In the first year, order one report from one agency, wait three months and order a report from the next agency, wait three months and order a report from the third agency. This way you are accessing your report each quarter of the year.

2. Dispute any errors on your credit report.

For the most part, items on your credit report will stay there for seven years, sometimes even longer. Once you have obtained your credit report, view it carefully for any errors. If you feel there is an item on your report that is listed in error, dispute the error with the reporting agencies. Instructions on how to dispute errors are available on your credit report as well as the agency web site.

3. Pay on time.

Paying your bills on time will help you establish good credit. Also, pay more than the minimum amount due each month. Remember: on time payments and the less you have in outstanding debt will lead to a better credit score.

4. Apply for credit sparingly.

Do not apply for every credit card or loan solicitation you receive. Too many inquires on your credit report can affect your credit score negatively. If you apply for many credit cards or Alternative Education Loans in a short period of time, it may affect your future ability to borrow additional educational or personal loans.


5. Beware of identity theft.

One way to avoid identity theft is to "OPT OUT" of credit based junk mail and credit card solicitations. If you would like to have your name removed from various solicitation lists, you can request this by calling 1-888-567-8688 or 1-888-5OPTOUT.

6. Don’t charge or apply for more than you can afford.

If you can’t afford to pay back the purchase or loan…..DON’T BUY IT.

Further information regarding financial aid, student loans and credit can be found on the following web sites:

The Smart Guide to Financial Aid www.finaid.org

National Student Loan Data System www.nslds.ed.gov

New York State Higher Education Services Corporation www.hesc.com

Fair Isaac and Company www.fairisaac.com or www.myfico.com

Annual Credit Report www.annualcreditreport.com