The Importance of Building and Keeping Good Credit

If you are like most students during dental school, you will take out student loans and charge purchases on credit cards. When you apply for GradPLUS or private/alternative student loans or for other credit, your credit file will be examined, and you will be assigned a credit score based on information provided by credit reporting agencies.

There are three kinds of loan approval tests widely used:

• credit-blind (no checking at all);
• credit-ready (no credit bureau file exists with any payment history);
• and credit-worthy (a file exists with one or more good reports and minimal bad reports).

The borrower or co-signer, if needed, may have to also meet a debt-to-income ratio and other lender requirements.

Credit Score

A credit score is a number that indicates how likely you are to repay a loan or debt from a credit card purchase. While it is only one piece of information lenders use when evaluating your loan application, it may be the basis for approval or rejection.

Credit bureaus and credit reporting agencies provide credit information to banks and businesses to help them decide whether to issue a loan or extend credit. This information includes your payment habits, number of current and past credit accounts, balance of those accounts, place of employment, length of employment, records of financial transactions, your payment history, and a history of past credit problems. People who make all their payments on time are considered good credit risks. People who are frequently delinquent in making their payments are considered bad credit risks. Defaulting on a loan can negatively affect your credit rating.

With the exception of the GradPLUS loan, your credit rating is not checked for eligibility for federal student loan programs, but approval for private loans and some institutional loans may depend on your credit history. Students who have defaulted on previous federal educational loans may be required to agree to repay the loan and begin making payments before they can become eligible for further federal aid.

The Fair Credit Reporting Act and the Equal Credit Opportunity Act help ensure that lenders rely on "likelihood of repayment" as their chief criterion when granting credit. Scoring models do not consider race, gender, nationality, religion; whether you are married, single, or divorced, or other prohibited factors. For more information about credit scores visit,  www.myFICO.com.

Checking Your Credit Record

All U.S. consumers are eligible to obtain a free copy of their credit report through the only authorized site,  www.AnnualCreditReport.com. You should obtain a copy of your credit reports annually from the three major credit bureaus to make sure there are no errors. The majority of credit bureau information is accurate, but you have the right to examine your file and to explain or correct the information it contains. Errors could affect both your credit rating and your credit score. Annual review of your credit record is also a good way to monitor identity theft.

The  Consumer Credit Counseling Service, 866-889-9347, offers free or low-cost debt and credit counseling.

Cautions about Credit Cards

If you are like most students, you've received numerous credit card offers promising low interest rates and credit lines of several thousand dollars. If you have accepted these offers and presently carry a balance on one or more such credit cards, you should carefully examine your card use. Although having a credit card is beneficial, problems can arise when you don't pay the bills on time and begin carrying a balance that can balloon into a mountain of debt.

Here are some helpful hints on using credit cards:

• Before you buy an item, evaluate whether you really need it; if not, don't buy it.
• If you make a purchase with a credit card, pay the balance in full at the end of the month. Don't carry balances. Some cards charge 20% or more in interest (usually called finance charges on your statement).
• If you accumulate credit card debt, you may want to transfer debt from high-interest cards to lower-rate cards.
• Read your statements carefully and call the company right away if you have questions, about a charge.
• Avoid taking cash advances. The finance charge on a cash advance often starts applying the moment you receive it, not after the next statement closing.
• Be aware of annual fees. Many companies charge $25 and more for the privilege of using their card.
• Be aware of introductory offers. Usually low interest rates are offered in the beginning, only to increase dramatically after the introductory period expires.