Does Applying For Financial Aid Affect Credit Score?
Wondering if applying for financial aid and student loans affects your credit score? It depends on what loans you apply for. Read to find out more.
As you apply for financial aid and student loans, you might wonder if it affects your credit score. The short answer is it can depend on the type of financial aid you apply for and how you apply for it.
First, let’s talk about what exactly a credit score is and how applying for private student loans can affect it.
What Is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness — as in how risky you are as a borrower based on how you manage credit and loans. While there are different scoring models, the one most lenders used is the FICO score, which ranges from 300 to 850.
The higher your score, the less risky you appear to lenders. In other words, you’re seen as someone who is likely to pay their bills on time.
Some factors that make up your credit score are:
- Payment history, such as on credit cards and loans
- Debt-to-income ratio
- Age of credit accounts
- Credit mix
- Recent credit inquiries
Missed payments, late payments, and delinquency on any loans are among several factors that can negatively impact your credit score.
How Applying for Financial Aid Affects Your Credit Score
Where applying for student loans might affect your credit score is in the number of applications you submit and for which types of loans. When you submit a loan application, your lender will request a credit inquiry from any of the three major credit bureaus — TransUnion, Equifax or Experian — and those remarks could affect your credit score.
Keep in mind that some federal student loans don’t check your score, so you’re not affected there. That’s because your credit score isn’t factored into your eligibility when you fill out the Free Application for Federal Student Aid (FAFSA); it’s usually based on financial need. PLUS Loans, a type of federal student loan from the U.S. Department of Education, will check your credit history, but your score won’t be affected.
If you apply for private student loans, your credit score could be affected, as lenders will look at your credit history and score to determine eligibility. However, that depends on the type of credit inquiry the lender conducts.
The two types of credit inquiries are:
- Soft inquiry: Sometimes called a soft credit pull, a soft inquiry is usually done when you’re prequalifying for loans, including student loans. These types of inquiries won’t impact your credit score.
- Hard inquiry: Also called a hard credit pull, the lender must ask for your permission first, which is usually reserved for when you submit a full application. These inquiries will show up on your credit report and can affect your credit score.
When you apply for a private student loan and are getting prequalified and the lender does a soft pull, your score won’t be affected. However, with a hard credit check, it can, although how much depends on your existing credit score.
If you have a good credit score, the effects on your score are typically minimal. If you have a low score, the effects may be more significant. In most cases, your score could go down around 5 points or fewer for those with higher scores.
The good news is that credit inquiries don’t remain on your credit score as long as other types of activity do. Most will find the effects will go away after 12 months, and in 24 months, inquiries tend to disappear from your credit report.
What Happens When You Apply for Student Loans
You may be wondering if your score will go down significantly if you apply for multiple student loans. For instance, if you apply for five loans, does that mean your score will go down around 5 points for each inquiry?
The answer is probably not.
According to FICO, applying for multiple loans within a short time frame — usually within 45 days — will count (or have the same impact) as a single hard credit inquiry. That means your score may be minimally affected, especially if you already have a good credit score.
How credit scoring models are able to distinguish what your intentions are is whether you’re opening multiple accounts or shopping around for rates. To do so, the time frame in which lenders make inquiries is important.
If you have inquiries over a short period of time, it seems likely that you’re trying to find a student loan lender that offers you the best rate — as in the purpose is to find one lender.
However, if the hard inquiries are spread out over a longer period of time, it might seem like your intent is to take out multiple loans.
How to Have the Least Impact on Your Credit Score
You may be tempted to forgo shopping around for rates and just pick the lowest rate on a website in the hope your credit score won’t go down too much. However, you could risk paying more in interest throughout the life of your loan, costing you thousands of dollars.
Just because a website advertises a lower interest rate doesn’t mean that’s the rate you’ll be offered. That’s why it’s important to submit applications to multiple lenders to see what your rate could be and make comparisons that way. Your credit could be affected, but only minimally and temporarily.
What you can do first is find private lenders that offer soft credit inquiries to check rates and submit a full application if you like what you see. Or you can do your rate shopping within 45 days so the inquiries count as only one hard credit inquiry.
If you’re applying with a co-signer, know that you’ll want to talk with them beforehand so you can coordinate completing multiple applications within that 45 day time frame, increasing the chances your score is minimally affected.
Applying for private student loans may impact your credit score, but only if the lender conducts a hard credit pull. However, the effects should be minimal if you have a high score, and, either way, your score likely will be only temporarily affected.
Understanding that multiple loan inquiries within a 45 day period only count as one inquiry will help you plan to submit loan applications accordingly. Plus, it can take some work to research multiple lenders and submit an application with each one.
That’s where Juno comes in. We can help you find the best student loans rates. We do so by negotiating on behalf of borrowers with lenders to save you as much money as possible. Join Juno today to learn more about your options for affordable financing.
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.
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