A recent New York Times article has some interesting insights into the ongoing debate over what the impact of shopping for alternative loans can have on your credit score. Here are the highlights:
- Fair Isaac, the firm that helps credit bureaus (Experian, Trans Union and Equifax) calculate credit scores treat student loans differently from mortgages or auto loans. While they allow comparison shopping for the latter two loan types without dinging credit scores, they do not accord the same treatment to student loans.
- The NY Attorney General's office has requested that Fair Isaac change this policy and they have thus far refused.
- A Fair Isaac spokesperson indicated that they had spoken to five lenders and the article indicated that the company "hasn’t found any who say that applicants have experienced credit score drops." Meanwhile, a Sallie Mae spokesperson indicated that "We do see it."
- Two of the three largest credit bureaus responded to the reporter's request for information about their practices:
- "Equifax confirms that it does not specifically classify credit requests from student loan lenders, though a process to do so is in the works."
- "According to Experian, a small drop in a credit score is possible, and whether it happens depends on the type of classification the lender uses."
So, how should a potential alternative loan borrower respond to this information: shop around but do it intelligently:
- See if your home state has a non-profit agency that offers a low cost alternative loan program, such as New Jersey's NJClass program.
- Use your school's alternative lender list as a starting point. Why? Lenders generally provide better loan terms to the school channel compared to loans they originate through the D-T-C (direct-to-consumer) channel. My own limited research (of three lenders) found up to a 300bp (3%) interest rate differential and 9% difference in fees (0 fees vs. 9% origination fee) between school channel and D-T-C lenders.
- Apply to at least three lenders (as suggested by Mark Kantrowitz of finaid.org). I might even suggest trying 4 which would include 2 banks, 1 student loan finance company and a non-profit in your state (if applicable). The article suggests that "Big banks, apparently, are less vulnerable," to this reduction in credit scores due to shopping around.
- Shop quickly. Since most of the applications require a similar set of information, complete all of your applications in one sitting, so you can make a timely decision and not drag out the process.
While the article suggests that your credit score may take a small hit in the process of shopping around, the thousands that you can save by finding a better loan deal would seem to far outweigh this potential risk. Longer-term, let's hope this inequity of penalizing borrowers who shop around for student loans is remedied.
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