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Taking ownership of your finances can feel exhilarating. But at the same time, it can be scary, especially when you start thinking about student loans.
When questions like "Do I have the credit score I need to get a student loan?" begin creeping into your thoughts, stepping into full-fledged financial adulthood can feel downright daunting. Especially if you need to find out what your credit score is and learn more about the three-digit number that creditors use to see how well you manage money.
We're here to help. In this article, we'll guide you through everything you need to know about credit scores and how they affect student loans — and vice versa!
The short answer is, that depends on a few of factors, like your age and what type of student loan you apply for.
Being a student means you're embarking on your new life as an adult. But a new beginning also means you're starting your financial life with little to no credit history, too. Chances are, your credit score reflects this lack of credit history.
But lenders rely on credit scores to help them decide on potential borrowers' creditworthiness. So what impact does your credit score have on the student loan application process? It's normal to worry and wonder, "Can I get a student loan with a 600 credit score? Will I be declined for a student loan just because of my credit score?"
It seems unfair, since you haven't even had a chance to build a credit history yet. But luckily, both government and private lenders are fully aware of students' credit score dilemma.
With the full-time tuition for undergraduate programs averaging out to $6,6931 — and from $10,735 to $22,731 for certain professional degree programs2 — student loans are a necessity for many students.
There are two main types of loans available for university and college students in Canada: government student loans and private student loans.
Government student loan
The Canada Student Financial Assistance Program is the umbrella under which federal loans and provincial and territorial loans are provided. The program offers both grants and loans, and you'll only need to make one application through your province or territory's student aid office.
When you apply, you'll be assessed for your eligibility for both grants and loans under the program. If you get a grant, you won't need to pay it back, while loans are repayable six months after you finish school.
Most students heading straight to university or college from high school won't have to worry about their credit scores when applying for a government student loan. The eligibility requirements are based primarily on your financial need, so important factors include the financial resources you have access to for education expenses, such as your parents' annual incomes.
But if you're older than 22, the government will do a credit check to review your credit history. Ontario, for example, gives your credit check a pass if you haven't been delinquent for more than 90 days on three or more credit accounts or loans (each with a value of at least $1,000) within the past three years.3
You can obtain an estimate of the grants or loans you may be eligible for through the federal Student Aid Estimator. You can also find information about provincial and territorial grants and loans at each of the provincial and territorial student aid websites.
Private student loans
If you're not eligible for a government student loan, or if you need additional funding to top up your government student loan, you can apply for other types of credit or financing options to help you meet your financial needs.
Most lenders have lines of credit and credit cards specifically for students. For example, Scotia has a host of products designed for you as a student:
- ScotiaLine® Personal Line of Credit for Students
- Scotia Professional Student Plan (SPSP) Line of Credit, for students pursuing a professional degree
- Scotiabank® Scene+™ Visa Card(for Students)
Mix of student loans
According to Canada's most recent National Graduates Survey,4 which is conducted every five years, nearly 50% of students surveyed held student debt at graduation (with an average student debt load of $24,000), and 31% of these students had paid off their debt within three years after they'd graduated.5
DID YOU KNOW?
o The Canada's National Graduates survey reported on the types of loans students held at graduation:1
- The survey also reported on the types of loans students held at graduation:6
- 53% of graduates had government student loans
- 25% had private loans
- 22% had both types of loans
A credit score is a three-digit number ranging from 300 to 900. You can access your credit score through Transunion or Equifax, Canada's two main credit reporting agencies. If you're a Scotiabank customer, you can check your Transunion credit score online for free.
But how do you know if you have a good credit score — or a poor credit score?
Credit score ranges
Credit scores are grouped into ranges, so you can see at a glance which category your credit score falls into:
- Excellent: 760-900
- Very Good: 725-759
- Good: 660-724
- Fair: 600-659
- Poor: 300-599
A good credit score for students
Chances are, your credit score will be on the lower side simply because you haven't had the time yet to build credit history. So, how can you determine if you have a good credit score, considering you're a student with little credit experience?
Here's an average you can use for comparison: Individuals between the ages of 18 and 24 have an average credit score of 692. With this score as a benchmark, you know you have a good credit score if yours is higher.
In addition to helping fund your post-secondary education, student loans also help you build credit history. To make sure this benefit doesn't turn into a double-edged sword, it's a good idea to learn good financial management — and put what you learn into practice.
Your payment history is the largest factor credit bureaus consider when they calculate credit scores7, which means your track record when it comes time to repay your student loans can have a major impact on your score.
With that in mind, here are some tips to help you use your student loan payments to build your credit history:
Government student loan
You won't have to begin repaying your government student loan until six months after you graduate. Once the six months are up, you'll need to begin making payments, but you'll have a number of repayment options to select from, including interest rate options, monthly payment amounts and your payment date and frequency.8
While your goal is to pay off your student loan debt, keep in mind the impact your student loan repayment history can have on your credit score.
It's a good idea to review your financial situation so you can choose payment amounts on a schedule that’ll work for you.
Private student line of credit
Unlike a government student loan, with most private student lines of credit you'll need to make interest-only payments any time you have an outstanding balance on your account, which means you'll need to make payments while you're still in school.
Payments on your debt principal are deferred until you graduate, and many private lenders offer a repayment grace period for the principal as well. The ScotiaLine® Personal Line of Credit for Students, for example, gives you a 12-month grace period after graduation for repayment of the principal amount borrowed.
So, if you have a private student line of credit, you'll need to begin making payments once you start drawing funds from your credit line. Missing or late payments will negatively affect your credit score. On the plus side, this also gives you the chance to begin developing the sound financial habits that help build a solid credit history while you're still in school.
Student credit cards
Student credit cards offer certain benefits — such as no annual fee. But in all other respects, they're treated just like any other credit card, which means you must make at least the minimum payment each month you have a balance on the card. If you are approved for a student credit card, it's vital for you to make your monthly payments on time.
And while you may have months when you can't pay off the balance in full, you should always pay the minimum monthly payment. Whether or not you're still in university or college, late or missing payments can have a negative impact on your credit score.
While it may take you some time to get to a good credit score, the following tips can help you start on the road to improving your credit score over the long term:
- Make your payments on time. As we mentioned above, on-time payments are crucial for a financially healthy payment history even if you can only make your minimum payment that month.
- Aim for a good credit utilization ratio. A credit utilization ratio reflects the percentage of your available credit you're using. You want to keep your ratio low by using less than 35% of your available credit.9
- Consider whether you should close or keep old credit accounts open. The length of your credit history also has an impact on your credit score, so even if you find yourself not using a credit product, it's often better to keep the account open.
- Apply for credit sparingly. Making multiple applications for credit with various lenders can be a warning sign for other lenders, so try not to apply for credit unless you really need it.
- Have a good credit mix. When considering future credit options, keep in mind that it's better to have more than one type of credit on your credit history (for example, a credit card in addition to a loan). However, as the previous section mentions, only apply for credit you actually need and can afford based on your personal financial situation.
Also read: How to increase your credit score
Your credit score doesn't need to be an obstacle when it comes to getting a student loan. Developing solid financial habits early on, for example with your loan repayments, may help you improve your credit score in the long run.
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