Office of Student Aid : Parents of Students : Parent Newsletter

Penn State Office of Student Aid Parent Newsletter

February 2008

The Facts on Credit

For many families, financing an education means borrowing money. There are federal student and parent loans, as well as private or alternative educational loans. These student loans require a credit check before they can be approved. So, what's in a credit score?

A credit score is a number that represents a borrower's likelihood of repaying a loan as agreed. Sometimes, it is a number based solely on the information contained at credit bureaus. In other cases, the credit score is a combination of credit bureau information and information that you, as a borrower, include on a loan application, such as employment history. The score is a snapshot of the level of risk that a borrower represents to a lender at a specific point in time. The amount of risk that is acceptable to a lender will determine whether the lender will approve your loan application and, in some cases, the interest rate you are eligible to receive.

A number of items impact your credit score. The score typically includes the number, type, and age of your credit accounts, as well as the number and severity of late payments. It includes your total debt, any adverse public records (like bankruptcy or wage attachments), and recent inquiries on the account. It is important to note that accounts on which you owe no balance can impact your credit score since the potential for debt exists based on the open credit line. You will want to keep that in mind if you frequently transfer balances based on promotional offers.

Agreeing to cosign on a loan will impact your credit score. As a cosigner, you agree to take responsibility for repaying a debt if the primary borrower does not pay. Before you agree to cosign, consider the following tips from the Federal Trade Commission:

• Be sure you can afford to pay the loan. If you are asked to pay and can't, you can be sued, and your credit rating will suffer.
• Even if you are not asked to repay the debt, your liability for the loan may keep you from getting other credit because the creditor will consider the cosigned loan as one of your obligations.
• Before you pledge property to secure a loan, make sure you understand the consequences. If the borrower defaults, you could lose the items you provided as security.
• Ask the lender to calculate the money you might owe. They are not required to do so, but may if asked.
• Ask the lender to agree, in writing, to notify you if the borrower misses a payment.
• Make sure you get copies of all important papers.
• Check state laws for additional cosigner rights.

If you are turned down for credit, you are entitled to a free copy of your credit report. Even if you are not turned down for credit, it is a good idea to check your record before making a major purchase or even once a year. It is a good way to watch for mistakes and possible identity theft. The Fair and Accurate Credit Transactions (FACT) Act actually allows for access to free credit reports on the Web.

Credit can be a complex and sometimes confusing subject. For more information on the topic, you can review the following Web sites:

Federal Trade Commission Facts for Consumers--Your Access to Free Credit Reports
Equifax
Experian
TransUnion