7 Facts You Should Know About Student Loan Forgiveness Programs
It may be easier to get rid of your student loans than you ever thought possible!
Understand common credit scoring models and what they mean for you.
Both FICO and VantageScore both range from 300 to 850. Most people have credit scores between 500 and 800. Although it’s possible to have a perfect credit score, it’s fairly uncommon that someone achieves the absolute highest score of 850. It’s also uncommon to have the worst credit score at 300.
Although FICO and VantageScore use the same numeric range, they break the spectrum up differently. FICO categorizes debt from bad to excellent, while VantageScore goes from deep subprime to super prime. Those ranges don’t exactly match numerically either. So, for instance, if your credit score is 670, that’s prime on VantageScore, but only fair on FICO.
Here are the ranges for FICO scores:
|FICO Range||Credit Score Designation|
|Above 800||Excellent or exceptional|
|670-739||Good (this is the median credit score range)|
|580-669||Below average or fair|
|Below 579||Poor or bad|
Here are the ranges for VantageScore 3.0:
|VantageScore 3.0 Range||Credit Score Designation|
According to the FICO range, good credit scores start at 700. But as you can see from the map below, most consumers have scores in the 600s. In fact, it wasn’t until last year that the average national FICO score topped 700 for the first time in scoring history. And while the credit score range chart above says 700 is at the bottom of good, FICO’s own analysts describe it differently.
“A score of 700 is considered very good credit,” explained Ethan Dornhelm, FICO Vice President for scores and analytics. “Consumers will likely qualify for the credit they want at favorable terms.”
So, if you’re aiming for a target, 700 may be a good first goal. Most lenders will at least approve you with a FICO score of 700. You should also qualify for at least average interest rates at 700. However, keep in mind that smaller lenders and financial institutions like credit unions may have higher minimum requirements. So, if you’re comparing lenders to find the best deal, you may encounter lenders that have a minimum requirement of 720 on at least some types of loans.
In most cases, any score that’s less than 600 means you may struggle to get approved for traditional financing. But that doesn’t mean that all doors will be closed to you when it comes to qualifying for loans. You just have to find a lender that’s willing to work with consumers will lower credit scores.
Depending on the type of credit you need, there are also programs and options specifically designed for people with bad credit. For example, you generally need a FICO score of 620 or higher to qualify for a traditional fixed-rate mortgage. But you can qualify for adjustable-rate mortgages as long as your score is above 600. But even if that doesn’t work, there’s still hope. FHA loans backed by the Fair Housing Authority are designed for people that face financial challenges, such as low credit. First-time homebuyers have gotten approval with scores as low as 560.
When it comes to credit cards, you can get around a bad credit score entirely by getting a secured credit card. This is a card that you open by making a cash deposit to the creditor. They give you a credit line equal to that deposit amount. If you don’t pay the money back, they use the deposit to cover your charges. This means the creditor minimizes their risk, so there is no credit score requirement to open a secured credit card account.
The term “subprime” became a buzzword around the mortgage crisis of 2008 that contributed to causing the Great Recession in 2009. The use of prime is this case doesn’t specifically refer to VantageScore in this case. Instead, it just generally refers to anyone with less than fair credit.
Mortgage lenders relaxed their lending standards heavily in the early 2000s. They basically started approving mortgages even for borrowers with bad credit. While these borrowers couldn’t qualify for traditional fixed-rate mortgages, these relaxed standards meant that borrowers could qualify for adjustable-rate mortgages.
When the housing bubble popped and home values fell, mortgages went upside down. Borrowers owed more on their loans than the homes were worth. High-risk subprime borrowers with bad credit were hit the hardest and were generally the first to default. Lenders tightened their standards back up, which is why 600 is generally the cutoff unless you have a loan back by FHA.
However, this serves as a cautionary tale for borrowers. Just because you can get approved for a loan based on your credit score, it doesn’t mean that you should get that loan. Debt.com’s founder warns that the same relaxed lending practices that led to the mortgage crisis have moved on to the auto loan industry. So, while it’s important to find a lender that’s willing to work with you if you have a low credit score, always consider your budget and your ability to repay a debt before you sign the loan agreement.
Knowing how credit scores are calculated means it’s fairly easy to figure out how to raise your score. But raising your score does take time. In most cases, you can instantly improve your score. The only way to get fast results is through credit repair, which can improve your score in as little as 30 days. But that only works if there are mistakes in your credit to correct. If you legitimately incurred a lot of negative items on your credit report, then it’s going to take some work to improve it.
Your credit history begins when you take on debt that needs to be repaid. Creditors report your payment history and balance to the bureaus every 30 days. So, your starting score will be based on how responsible you are with repaying that first debt.
That being said, the less weighty scoring factors matter more when you have a limited credit history. If you only have one account, then you don’t have a diverse mix of debt. You also have a very young credit age. But don’t go crazy applying for credit to build your payment history faster. If you make too many applications within a 6-month period, that will decrease your score, too.
If you spread out getting small loans and secured credit cards and ensuring you make all your payments on time, it generally takes about 12-24 months to get a score that will allow you to start qualifying for traditional unsecured credit cards and bigger loans, like auto and home.
If your score is low because of some past troubles with debt, don’t panic! There are steps you can take to raise your credit score. The good news is that the United States credit system is very forgiving. By law, negative items like missed payments or even bankruptcy can’t stay on your credit report forever. They fall off after a set amount of time – usually 7 years.
But even before that, the “weight” of how much past mistakes affect your score decreases over time. A payment missed last month is far worse for your score than one missed five years ago. That means that taking positive actions now can offset any past mistakes quickly.
Debt.com offers a step-by-step guide on how to improve your credit score. But here’s a quick snapshot of what it will teach you:
If you follow the steps we recommend, you should see positive movement in your score within 6 months to a year. Then, it should take about 24-36 months to achieve a good score, but it depends on how many negative items there are to offset.
Any decrease in your credit score will be disheartening, but it isn’t always immediately clear why your score dropped. The most likely culprits for a decrease are:
But if you haven’t made any of these obvious mistakes, a drop in your credit score can seem to come out of nowhere. Our expert Steve Rhode, the Get Out of Debt Guy understands.
“It can seem that there are people in secret rooms armed with dartboards, roulette wheels or Magic 8-balls attempting to assess your credit score daily. Sometimes it goes down and you have no idea why,” Steve says. “But there is always a pattern, even if you can’t immediately see it. Your credit score goes down because there is an event that took place that – from a creditor’s perspective – makes you seem like a higher credit risk. You just have to find that hidden reason.”
Aside from the common reasons for a score to drop that we list above, here are some less common reasons that credit scores drop.
Closing an old account doesn’t seem like it should make you a higher risk borrower. But if you close your oldest account that you maintained in good standing, you decrease your credit age. Thus, you look like a less experienced borrower.
And realize that you don’t even need to actively decide to close your account for this to happen. If you don’t use a credit card, the creditor may close the account for you due to inactivity. So, check to make sure all your accounts are still open. In addition, find good small uses for old accounts, so you keep them open.
Credit bureaus and the lenders and creditors that report to them make mistakes. A creditor may have reported that you missed a payment that you actually made on time. Or they might have reported you went over your credit limit when you aren’t anywhere close to it.
So, if your score drops, review your report to make sure you don’t have any new negative items that shouldn’t be there. If you do, start the credit repair process immediately. Once you correct the error, your score will bounce right back.
If you didn’t do anything wrong that negatively affected your score, maybe someone else did. If someone got your credit card number, they may have run up a balance in your name. Your Social Security number could also be compromised. You may have new accounts – or new accounts that have been run up and already gone to collections.
Again, review your credit reports to make sure you recognize all the accounts and that there’s nothing new you didn’t expect to see. If there is, it may be time for a credit freeze. Good news, as of September 2018, freezes are free!
Cosigning is often risky business. You want to help someone out because they have weak credit, so you agree to cosign. But if they don’t pay the debt back, you’re on the hook and nonpayment will affect your score. If the bills aren’t coming to you or you aren’t checking the paperless transactions, then the first sign of trouble might end up being a missed payment on your credit report. This would negatively affect your score.
This can also happen to joint account holders who separate. Even if a divorce decree decided that one partner was responsible for a debt, if the other partner doesn’t remove themselves as a joint account holder, they could experience credit damage if the responsible party doesn’t pay. This is why you should always address joint accounts removals promptly after a separation.
This one sounds a little counterintuitive. Paying off a loan sounds like it should be good for your credit score. But some consumers have experienced a slight decrease in their score following the completion of a loan repayment.
“I can understand why people would be confused and even a little irritated when this happens,” Rhode commiserates, “Why would a responsible act like paying off a loan drop your score? The reason has to do with limiting the diversity of your credit.”
Basically, the smallest credit score factor evaluates what types of debt you hold and the diversity of your debt. There are good debts and bad debts. Good debts are anything that increases your net worth or lifetime earning potential. When you pay off debts, like mortgages and student loans, you lose a good debt and decrease the diversity of your debt. Rhode recommends not to panic if this happens.
“Certainly you do not want to take out another loan to improve your score,” Rhode advises. “So relax. In this case, solid management of your remaining accounts will bring your score back up naturally.”
Article last modified on June 5, 2019. Published by Debt.com, LLC