Student Loans Can Help Build Credit, Too
By Eva Norlyk Smith Ph.D.
January 22, 2013
I just found out I got accepted into a graduate program in New York! It starts in August. I'm excited, but my friend who moved there last year said that lots of landlords over there check your credit. I have no credit. I got an apartment in my current town, no problem, and I always pay rent on time, but I've never had a credit card or a car loan. Do my undergrad student loans (which I pay on time) count toward good credit? Do I need to get a card and pay interest on it just to get an apartment? What are some things I can do between now and then so that I can get my credit up to snuff? — Leah
Congrats on getting into grad school — no wonder you're excited!
Fortunately, you don't need to be too concerned about your credit. The fact that you don't have credit cards or a car loan doesn't mean that you don't have a credit report. Student loans count toward your credit score, too. In fact, student loans are typically counted as installment loans (loans that require you to pay a fixed monthly amount). That means they are considered similar to a car loan. Because you have paid your student loans on time, those loans will be affecting your credit scores positively.
At the same time, you do have what is known as a “thin” credit file. That means that there's just not that much information available about your credit habits. You haven't used credit for that long, and you have only used one type of credit — the student loans. That will detract from your credit score, but not enough to put you in the “bad credit” category.
You can use this FICO score estimator from Bankrate to get a sense of where your FICO score is. There are many different types of credit scores, but FICO is the one most lenders — and landlords — are likely to rely on. Guesstimating your situation based on the information you give, the calculator comes up with a FICO score range of 690 to 740 for you. The cutoff for excellent credit is around 720 to 740, so even if you don't fall in the “excellent credit” category, you will probably have what is considered good credit. If you want to be sure down to the last digit, you can check your FICO score for about $20 at MyFICO.com.
Most landlords will take into consideration the fact that you are young and won't have a long credit history. Their main interest is to make sure that you don't have bad credit. For example, if you had been late in paying your student loans or missed payments altogether, that would have lowered your credit score considerably. Payment history on loans is usually a reliable sign of how well people manage their finances in general and recurring payments in particular. The thinking is that people who can't manage their finances well enough to meet their loan payments will likely also have problems setting the money aside to meet their rent payments.
So, even though you probably don't need to worry about your credit score, what can you do to further stack the odds in your favor? Well, most landlords want to know if you'll be a good tenant — and that you won't just pay on time, but take good care of the apartment you are renting. So if you bring written references from your previous landlords, that will be a plus (presuming they are positive, of course). The references will need to include phone numbers, so they can be verified.
Secondly, you can be proactive about bringing landlords the documentation they will need to consider you. Bringing a copy of your FICO score (no more than 3 months old) and your credit reports (you can get one free every year from each of the three credit bureaus at AnnualCreditReport.com) would be one way that you can stand out from the crowd by showing landlords that you're willing to go the extra mile.
Last but not least: You are at an age where you should begin to build a more solid and nuanced credit history. One of the best ways to do that, in addition to continuing to pay your student loans on time, is to apply for a credit card. You may have sufficient credit to apply for a card online and get accepted for a generic bank credit card. If that doesn't work, apply for a student credit card. The application criteria for student cards take into account that applicants are young and will have a limited credit history, and being a student at a university can often be enough to qualify — although you will likely get a lower credit limit than you would with a regular credit card.
And no, you don't have to pay credit card interest to build your credit history. Credit cards come with a grace period before they start charging interest. If you pay the balance off in full by the due date each month, that grace period resets every month. That way, you can have your cake and eat it, too, building your credit without getting charged a cent of interest.
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