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 Knowledge for the CommonWealth

Factors That Influence Your Credit Score

Farm Business Management Update, April 2002

By David M. Kohl

As the recession deepens and job layoffs become more prevalent, creditors and lenders are carefully scrutinizing your credit record. Some lenders are using a quick credit scoring system as a means of accepting or denying your credit application. What factors can increase your chances of being a good credit risk and improve your credit rating?

Credit History

A large part of your credit score is your credit history and ability to repay. In some scoring systems utilized by equipment and auto dealers, this criteria can represent 35 percent of the total score.

A number of recent late payments on your car, utility bills, machinery, or mortgage can reduce your score dramatically. If the delinquencies occurred three to five years ago, the discount on your credit rating will not be as large.

If you have had billing problems with the hospital or legal difficulties resulting in financial problems, check your credit history every six months to determine how your credit worthiness has been affected.

If you feel your credit history on your report is not representative, you have options. You are allowed up to a 100-word explanation of your credit difficulties and how you plan on resolving them. This explanation will show up on your credit report when creditors and other interested parties probe your record to determine credit risk.

Recent figures from the Federal Reserve indicate that one in twenty home mortgages are more than 30 days in arrears. More startling is that credit card delinquencies are at an all-time high of approximately 5 percent.

Credit Cards

Your credit score will be impacted by the balances on your credit cards. Balances as a percent of limits influence the score. Amounts in the extremes, either zero or 75 percent or more of the limit, can be detrimental to your final score.

The most recent figures report in the USA Today finds that two-thirds of adult Americans have average balances of $9,400 on their credit cards. A warning to those who pay their cards off monthly, this will results in the credit card companies raising your credit limits: the higher the limits on your card, the greater the risk. Lenders perceive these limits as open lines of credit that are unsecured and can be used at your discretion.

Other Factors

Years of employment and residence are other variables included in the analysis. Your score will be discounted if both of these factors are under two years. The number of requests to access your record by creditors can also result in a lower score.

Total Score

The total scores range from 300 to 800 points. A score under 600 points will often result in a denial of credit. If the credit is accepted, it may come with a higher interest rate attached to the loan.

If you are denied credit, you are allowed a free credit report. Lenders and creditors can only allow you access to your credit report if you give them permission. If you have a problem, it must be corrected in usually 60 to 90 days after you notify the credit agency.

Job Seekers Beware

Employers are now accessing your credit history in employment decisions. They are finding a direct correlation between work habits and the discipline to make your payments on time.

The Bottom Line

In todayıs tight credit and job market, it is important to know your credit score. Paying your bills on time and accountability in business and family budgeting is critical. Knowing your limitations in debt servicing and communicating with creditors if you have a problem is essential to your final credit score.

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