At CommonBond, we get a lot of questions from student loan applicants who are concerned about how applying for a student loan will affect their credit. The fact is, you can't ruin your credit simply by applying—the worst that it will do is trigger a hard credit inquiry on your credit reports (more on this below) that affects your FICO Scores in the short term. Still, there are a few ways you can manage the student loan application process wisely in order to safeguard your future scores.
1. Get as much info as you can from a lender without authorizing a hard credit inquiry.
As you may know, there is an important distinction between "soft" and "hard" credit inquiries. Soft inquiries are made by businesses that check your credit report and scores even though you haven't applied for a loan or line of credit from them. Examples of soft credit pulls include "pre-approvals" for credit card offers you receive in the mail or when you check your own credit. Soft credit inquires do not affect your FICO Scores.
Hard inquiries are made by businesses that check your credit reports and scores to help make a lending decision because you have applied for credit with them (like when you apply for a loan). Hard inquiries may hurt your FICO Scores in the short term—how big of an effect they have depends on the other information in your credit history.
Every student loan application will incorporate a hard credit inquiry at some stage, but you can often learn a great deal about your options before you authorize this. Gather all the information you need on your prospective lenders' loan terms, interest rates, repayment options, and anything else you're concerned about before you go through the application.
Additionally, some lending platforms, like CommonBond, will do a soft credit pull early in the application process in order to quickly show the estimated rate that a customer will get if they move forward to the hard credit pull later. Don't hesitate to reach out to your lender's customer service team if you have any questions at all—you'll want a lender who's responsive and helpful down the line, and now's a good time to confirm that.
2. Apply for all your loans within a short period of time.
For some lenders, you won't be able to see your interest rate unless you authorize a hard inquiry. Don't worry—FICO understands that shopping for the best rate is good for consumers, so the FICO scoring algorithm accounts for that. Specifically, if you find a loan within 30 days, the inquiries won't affect your scores while you're rate shopping—(Source here). That means that, if you authorize all your inquiries for student loans within 30 days, your FICO Scores will count them as a single hard credit inquiry. (There are some nuances to this timing, depending on which FICO model your lender uses, so take a look at this explanation for more details.)
3. Managing your debt ratio.
Student loans are a big commitment, likely adding tens or even hundreds of thousands of dollars of debt to your credit records. Your debt level is the second largest factor in calculating your FICO Scores, so keep an eye on how much of your available credit you're using. On the plus side, student loans are a type of installment debt (a debt you repay on a schedule), and FICO Scores weigh installment debt like student loans less heavily than some other types of debt, like revolving debt on a credit card. So your FICO Scores would be less affected by a high debt load of student loans than by a high amount of credit card debt.
In fact, one of the simplest ways to keep your ratio of used-to-available credit low is to pay off all of your outstanding credit card debt. If your income is higher than it was when you applied for your cards, consider asking those lenders to raise your credit limits. If they increase the cards' limits, your debt will remain the same, but your ratio will improve with the higher available credit ceiling. (Make sure to clarify, however, whether the lender must conduct a hard credit inquiry to do this.)
Student loans affect everyone's credit differently, but knowing what factors affect your FICO Scores is the first step to developing your personal plan. Check out this breakdown of what goes into your FICO Score in order to help assess your credit situation. Have more questions on your credit and student loans? Leave a comment—we'd love to hear from you!