The one edge of consumer finance where your free credit score does not often determine your capacity to borrow is a student loan. Federal student loans are the rarest of financial products.
If you are wondering what is a good credit score for a student, you should know that you can repay most federal loans without having a credit history as long as you are enrolled in a higher education institution.
On the other hand, private student loans need good credit scores—the higher the number, the lower the interest rate for you.
What Is A Credit Score?
A credit score is a numerical representation of an individual’s creditworthiness, used by lenders and financial institutions to assess the likelihood of the borrower repaying their debts. It is based on the individual’s credit history and financial behaviour.
Key Features Of A Credit Score
Credit score helps lenders determine interest rates and loan terms. It is used by landlords, insurers, and employers to assess financial responsibility.
To understand credit score, it is important to know about the key factors influencing the same.
Here are a few key factors and features of a credit score:
1. Range: Credit scores typically range from 300 to 850. Higher scores indicate better creditworthiness.
2. Factors Influencing Credit Score:
- Payment history: Timely payments on loans and credit cards positively impact your score.
- Credit utilisation: The ratio of credit used to the total available credit.
- Length of credit history: The longer your credit history, the better your score.
- Credit mix: A combination of different types of credit (e.g., credit cards, loans) can improve the score.
- New credit inquiries: Too many inquiries in a short time can negatively affect the score.
| Common Credit Scoring Mode: FICO Score: Widely used in the United States. Vantage Score: Another popular model with similar criteria. |
Good Credit Score Ranges and Their Meaning
People typically categorise credit scores into ranges that indicate an individual’s creditworthiness. These ranges help lenders assess the risk associated with lending money.
While the exact ranges may vary slightly between credit scoring models, here’s a general breakdown:
What Is A Good Credit Score For Student Loan?
In India, when applying for a student (education) loan, the credit score of the applicant or co-applicant (often a parent or guardian) plays a significant role in the approval process. A good credit score for student typically ranges from 670 to 739.
Lenders typically assess the Credit Information Bureau (India) Limited (CIBIL) score, which ranges from 300 to 900.
Minimum CIBIL Score Requirements:
- Public Sector Banks: Institutions like the State Bank of India (SBI) may consider education loan applications with a CIBIL score as low as 591 for secured loans and 685 for unsecured loans.
- Private Banks and Non-Banking Financial Companies (NBFCs): These lenders often require a higher CIBIL score, typically around 700 or above, due to the increased risk associated with unsecured lending.
Key Points to Consider:
- Co-Applicant’s Credit Score: If the student lacks a credit history, lenders will evaluate the co-applicant’s (usually a parent or guardian) CIBIL score. A strong score from the co-applicant can enhance the chances of loan approval.
- Collateral: For higher loan amounts, especially those exceeding ₹7.5 lakhs, lenders may require collateral. Providing collateral can sometimes offset a lower credit score.
- Improving Creditworthiness: Maintaining a good credit history, timely repayment of existing loans, and managing credit utilisation effectively can improve one’s CIBIL score over time, thereby enhancing eligibility for education loans.
How Much Cibil Score Is Good For Education Loan?
Though most of the banks don’t expect a credit score for students and only consider co-applicants’ CIBIL Score, a few private banks might need student credit scores as well. Hence, here are a few tips to start building credit scores early:
- Open savings or checking account:
Begin your financial journey by maintaining a basic bank account. It teaches financial discipline and sets the foundation for future credit management.
- Apply for a student credit card:
Many banks offer credit cards specifically designed for students. These cards have lower credit limits and fewer requirements, making them ideal for building credit.
- Use a secured credit card:
A secured card requires a deposit as collateral. It’s an excellent option for those with no credit history.
- Become an authorised user
Ask a family member or guardian to add you as an authorised user on their credit card. This allows you to benefit from their positive credit behaviour.
- Pay bills on time:
Consistently paying bills (e.g., utilities, phone) on time can help establish financial responsibility and indirectly impact your credit.
- Monitor your credit report:
Regularly check your credit report for accuracy. In India, you can access your CIBIL report to track your progress.
How Often Should You Check Your Score?
It’s important to check your credit score regularly, but not too frequently to avoid unnecessary hard inquiries (which occur when lenders check your credit score). Here’s a guide:
- Recommended Frequency:
- Quarterly Check: Checking your credit score once every three months is sufficient to stay updated.
- Monthly Monitoring: For students who are actively building credit, a monthly review can help track progress.
- After Major Financial Events:
- Check your credit score after taking a loan or applying for a credit card to ensure no errors are recorded.
- Monitor it before applying for any major loan or mortgage.
- When Repairing Credit:
If you’re working to improve a poor score, check it monthly to monitor the impact of your efforts.
- Avoid Over-Checking:
While checking your own credit score through approved tools is considered a “soft inquiry” and does not impact your score, it’s unnecessary to check too often.
In simple terms, a good credit score is like a report card for your finances, showing how responsible you are with money. For students, a score between 670 and 739 is considered good and can help you get loans, credit cards, and better interest rates.
Building a good credit score takes time, but it’s worth the effort. By paying bills on time, using credit wisely, and checking your score regularly, you can create a strong financial foundation.
FAQs
1. Can a student have a credit score without a job?
Yes, students can have a credit score even without a job. Your credit score depends on how you manage credit, not your income. If you have a credit card, loan, or are an authorized user on someone else’s credit card, these activities can contribute to your credit score.
2. Do you need good credit for student loans?
Yes, good credit score is essential for students because it affects your ability to get loans, credit cards, and sometimes even housing. Building a good credit score early can help you secure better financial opportunities in the future, like low-interest rates on car or home loans.
3. How can I start building my credit score as a student?
You can start by:
- Applying for a student credit card or a secured credit card.
- Becoming an authorised user on a parent or guardian’s credit card.
- Paying all your bills, like phone or utilities, on time.
- Keeping your credit utilisation low.
4. Does checking my credit score hurt it?
No, checking your own credit score is considered a “soft inquiry” and does not impact your score. In fact, regularly monitoring your credit score can help you stay on track and identify any mistakes in your credit report.
5. How long does it take to build a good credit score?
Building a good credit score takes time and consistent effort. With responsible credit use and on-time payments, you can start seeing improvements in your score within a few months, but achieving a strong credit history might take a few years.
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