Improving your Credit Score to Better your College Financial Aid Options

Of the three main types of student loan options: Stafford, Parent PLUS, and Private Education Loan, parents’ credit scores play a large part in all but Stafford. Lending institutions have become more stringent on their lending practices for student financial aid. Like everything else in the loan industry, lenders are taking a hard look at applicants’ credit scores in order to rate the safety of the loan.  The better the credit score, the better the loan rate, and the better the chances of getting that loan you need.  But what makes up the credit score?  And how can you improve your score? Your credit score is based on a variety of factors, but will likely include:

• Amount of available credit – Don’t have more than half of your available credit used. If your credit card limit is 10,000 don’t keep a rolling balance on your card of over $5,000 it will make your score drop.
• Length of Payment history – this makes up about 35% of your score so pay your bills on time over a period of time.  Making timely payments on a credit card for two months will not reflect as well as having one for seven years with timely payments.
• Recent requests for credit – About 15% of your credit score is based on credit use.  Use it but don’t abuse it. Have a couple of cards you use regularly, but don’t open a bunch and then not use them, non-use can drop your score.

The best types of loans to get to help improve your score are a house payment, car payment and bank credit card. These show long-term credit history. For those of us that have had a lifetime to manipulate our credit scores with credit cards, mortgages and car loans, having a credit score isn’t a problem.  The goal is to have a credit score that is at least in the 600’s ideally try for at least a 660 credit rating or above.  So, how do you improve your credit score?  First off, don’t bury your head in the sand!  Parents of 4^th graders should be checking their credit score every year to work on building it.  You need this time to better your score by the time you are applying for education loans.

• Get a personal line of credit – Credit unions have a credit builder account usually you can pay a certain amount every month for a certain period of time to get your credit to a certain level.
• Secured Bank Card– Usually requires a deposit based on the amount of credit requested. So if you want a $1000 limit you have to have $1000 in an account to back it at the bank.
• Auto Loan- These are great because they usually report to all 3 agencies
• Major credit card– Making regular monthly payments but making sure that you keep around a 5-10% balance every month. FACT: You can get a higher score by leaving a small balance over fully paying it off every month.

Financial planning for college is something we’ve all heard of for some time now. Squirreling away various amounts to ascertain our kids will be able to afford a good college is a wonderful thought.  But for many, it’s just not a reality.  Focusing on growing your credit score could result in a better long-term plan because it will better your chances for a student loan. We want families to understand there are many ways to save for college and some will allow you to maximize financial aid at colleges (529’s are not one of them). In light of how much information is out there that is often misleading, we wanted to take time to educate you on the different kinds of accounts people traditionally save in and what you need to know about them. Feel free to give our office a call if you would like to talk about ways your family can build a college savings plan that maximizes financial aid at 425.329.2609.