A reader of AskTheMoneyCoach.com wanted to know how to increase her credit score while she is still in school.
She wrote me saying: “Hello, Lynnette. I’m a 60‑year‑old woman who has returned to school.
I’ve taken out federal loans in the amount of $8,000.
The loans have been deferred for as long as I remain in school.
I do not have any other debt, and now these loans have adversely affected my credit score.
I would like to know: What can I do to raise my credit score while attending school?” Here’s my answer. First, let me congratulate you on your decision to go back to school.
Even at age 60, it’s never too late to get a degree, and I applaud you for those efforts.
But I also want to caution you against believing in a myth about student loans.
Sometimes people mistakenly believe that, because they have student loan debt, those college loans are dragging down their credit scores.
Frankly, it’s just that: a myth. It’s not true.
If you are not paying your loans and they’re delinquent or in default status, then yes, like any other credit delinquency, that would be hurting your credit score.
But you’ve indicated that your $8,000 in student loans are actually in deferment because you are currently in school.
A deferred student loan is not adversely impacting your credit in any way.
Additionally, you need to know that there is a formula that dictates your credit score and how your credit score is calculated.
There are multiple types of credit scores, but let’s talk briefly here about the FICO credit score, which is the most popular credit score.
Here’s how to increase your credit score.
Five factors go into your FICO credit score. The FICO Score formula.
1. Payment Track Record
The number one component of your credit score, 35 percent of it, is your payment track record.
In other words, how well you pay your bills?
If you do nothing else other than pay your bills on time, that will help increase your credit score — even while you’re in school.
2. Credit Card Usage/Credit Card Debt
Another 30 percent of your credit score is based on the amount of credit card debt that you have outstanding.
You said, “I have no other debt,” so I’m assuming that you don’t have credit card bills.
However, you might have credit cards but not have any debts amassed on those cards.
It wasn’t clear to me from your email whether or not you meant, literally, “I don’t have any other credit,” or you just don’t have any other debts that you owe to others, because you can have credit without debt.
For example, as I just mentioned, you might have credit cards with zero balances.
If those credit cards have been extended to you, perhaps you have a $5,000 or a $10,000 credit line, so under this scenario you would have the credit, but not the debt, simply because you haven’t charged anything that you have not paid off in full.
Since 30 percent of your FICO credit score is based on the amount of credit card debt that you’ve charged, if you keep your credit card debt low, that will actually increase your credit score.
3. Length of Credit History
A full 15 percent of your credit score is based on the length of your credit history.
The longer your credit history, the better that is for your credit rating.
Since you’re 60, you’ve probably had more time to amass a credit history than, say, someone who’s 20 or 30. A longer credit history works in your favor.
4. Your credit mix
Under the FICO scoring system, 10 percent of your credit score is based on the mix of credit that’s found in your credit files.
In other words, what type of credit have you applied for and received? Student loans are one form of credit. It’s a form of installment debt, just like a car note is a form of installment debt.
Mortgages are another form of credit. Things like primary home loans, home equity loans or home equity lines of credit are all forms of mortgage debt.
Then there’s revolving credit or revolving debt. This main form of revolving debt is credit card debt. When the credit scoring system sees that you have these types of loans and/or credit in your credit file, you actually get rewarded for showing that you can responsibly juggle multiple forms of credit.
It’s actually better to have different types of credit, or multiple forms of credit in your credit profile as opposed to just one type of credit. If you haven’t established any other credit, then those student loans could possibly be the only thing showing up in your mix of credits. That’s not good. By the same token, it’s not good to only have credit cards listed on your credit reports.
5. New applications for credit
Lastly, the final 10 percent of your credit score is based on inquiries or new applications for credit.
Every time you apply for a credit card, a student loan, a car note, a mortgage, et cetera, a lender does something called a “hard pull” — meaning they pull your credit rating for the purposes of evaluating your credit history and deciding whether or not to extend you credit.
If you’re approved, a lender will also use the strength or your credit and your credit score to determine what loan rates and terms to offer.
A “hard” inquiry or “hard pull” is different than a “soft inquiry,” because a soft inquiry, or soft pull, is one where you pull your own credit rating to review your credit profile.
That doesn’t hurt your credit rating or your credit score at all.
A hard inquiry stays on your credit report for two years and it counts against you for the purposes of calculating your FICO credit score for one year.
You really want to limit the number of inquiries that are on your credit reports. So you should only apply for credit when you really and truly need it.
If you do all these things mentioned above, that will increase your credit score even while you’re in school.
