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Building good credit for grad school

NOTE: The following discussion refers to practices in the United States. Please be aware that the details in your location may be quite different.

Most graduate students must take out loans to finance their education. Anyone may take out certain Federal loans as allowed by their financial aid package, but in order to be approved for private loans or Federal PLUS loans, applicants need to have a good credit history. Additionally, it is important to garner good credit to obtain the lowest possible interest rates on those loans. Good credit, and the minimal debt that accompanies it, will make your graduate school experience less stressful and significantly cheaper, while also allowing you to use your good credit to jumpstart your life (buy a house, rent an apartment, purchase a car, etc) after you graduate.

Your credit report catalogues your credit-based transactions and bill payments, which are then analyzed to give you a FICO score (developed by the Fair Isaac Corporation, this three digit number reflects your creditworthiness). To get healthy credit for graduate school, start improving your FICO score two years before you plan to enroll in order to leave plenty of time to comfortably pay down debt. If you plan to enroll in less time than that, you can still follow these same basic rules. Even if you don't end up applying for grad school, an improved FICO score is an asset in any major financial investment you may make later on.

Start improving your credit by checking your credit report and FICO score for free (you are allowed one free report per year) at Annualcreditreport.com. Investigate what, if anything, is hurting your credit report and then take the proper steps to correct it. You can improve your credit and increase your score in three easy ways:

Pay your bills on time

Paying all of your bills on time for one full year will greatly improve your credit. Paying your bills on time shows that you are able to responsibly manage your money and that you are a low risk for defaulting on a loan. Utility accounts, credit cards, and loans all show up on your credit report, and one late payment for any of them can blemish your rating. One late payment on a bill to one company may give the other companies a reason to charge you a higher interest rate as well. If you are generally very good about paying your bills, but are tardy on one payment, don't worry. Just be careful to make all of your subsequent payments on time to correct the error and get your credit score climbing again.

Pay down your debt

Your credit rating is also affected by your ratio of debt to credit. By minimizing the amount you owe while maintaining a high credit limit, you will improve your credit rating. For example if you have a credit card with a $5,000 line of credit, but you only charge $100 in any given month, and pay the $100 off immediately, you will show that while you have much available credit, you aren't cavalier about using it.

Keep your oldest line of credit and don't seek new debt.

By keeping and paying down your old lines of credit, instead of transferring debt to a new credit card for a temporary rate reduction, you show that you are committed to paying your debt. The older your lines of credit, the higher your FICO score. If you have a high rate of interest, simply call the bank that issues your card and ask for a lower one—they will usually comply. Use only one credit card while you pay off the rest to reach a zero balance.

Once you're down to a zero balance on all cards, keep the one you've had the longest and get rid of the rest to eliminate the risk (or temptation) of incurring new debt. Even if, for example, you can afford to make payments on a car, don't buy one. Make a choice—a car loan or a school loan—not both. By having numerous sources of credit, you spread yourself thin, and your likelihood to default on one or more increases.

Conclusion and further resources

By following these simple rules—ideally starting two years before you apply for student loans—you are much more likely to be approved for better loans and to get a favorable interest rate on them. This will save you many thousands of dollars over the life of your loans, especially since a strong FICO score will benefit you in any major financial investment you make (not just grad school).

Remember, the three main factors affecting your credit report and FICO score are bill payment, the ratio of total debt to total credit, and the length of your credit history. Lucky for you, these are also the three aspects of your credit report over which you have the most control. You can inform yourself further by exploring other financial advice online and by contacting the financial aid offices of your prospective schools.