Most young or beginning farmers have an abundance of energy and a strong commitment to a career in agriculture. What they often lack is the capital necessary to buy livestock, equipment, or to cover a down payment on real estate.
In order to get the capital necessary to start farming, a beginning farmer is probably going to have to get a loan. In order to get a loan, he or she is going to need to have a good credit score.
A “credit score” is a number assigned to a potential borrower by a credit bureau. Lenders use a credit score as an indication of the borrower’s likelihood of paying their financial obligations on time. The score is based on an analysis of the person’s credit history using financial information gathered by the credit bureau.
There are three major credit bureaus in the United States: Experian; TransUnion; and Equifax. The credit bureaus routinely gather payment information for millions of people from lenders, credit card companies, utility companies, court records and other sources. They do not gather income data; only information related to debts.
When someone applies for a loan, the lender requests a credit report from one of the credit bureaus. The credit report will list all of the borrower’s financial obligations going back many years, and will show how many times a monthly payment was either missed or paid late. It will also list debts which have been sent to collection or other defaults on an obligation. A complex mathematical formula developed by the Fair Isaac Corporation (FICO) is used to derive a FICO credit score from all of the information on the credit report.
FICO credit scores range from 300 to 850. A score above 720 is considered good, and above 800 is very good. A score below 650 is not good. A score below 600 usually indicates there is a serious issue on the credit report such as a loan default, outstanding financial judgment, or other problem.
You are entitled to receive a free copy of your credit report each year from each of the three credit bureaus in order to check it for errors. The report contains all of your debt payment history, but does not include your FICO score. To obtain your free report, visit the website annualcreditreport.com; or call (877) 322-8228. Some credit card issuers offer free credit monitoring, as do services such as NerdWallet.
Here are a few tips for the young person with a limited or blemished credit history who wishes to build a good credit score:
Always pay all of your bills on time – including utility, cell phone and medical bills. Payment history is the single biggest factor determining FICO score. It accounts for 35 percent of the score.
Use no more than 30 percent of your available revolving credit. In other words, if you have a credit card with a $10,000 limit, don’t carry a balance of more than $3,000 on the card – even if you always pay it off every month. If you find yourself consistently using more than 30 percent of the card’s limit, either request an increased limit or make more than one payment on it each month. How much money you owe in relation to your available amount of credit accounts (your “credit utilization rate”) accounts for 30 percent of your FICO score.
Build long-term credit relationships with a few credit providers. Don’t open and close accounts frequently, or roll credit card balances from one card to another to take advantage of low introductory interest rates. Length of credit history accounts for 15 percent of the FICO score.
Use various types of credit and build a history of successfully making all payments on time. Show that you can handle making payments on a credit card, a vehicle loan, and a student loan all at the same time. Credit mix accounts for 10 percent of the FICO score.
If you have to carry balances on multiple credit cards, it’s better to have larger balances on a couple of cards than to carry small balances on many cards. Knock off the smallest balances one-by-one until you’re down to just a few.
Be cautious about applying for new credit in the months prior to taking a substantial farm loan. For example, don’t take out a loan to buy a new truck a month before you apply for a farm real estate loan.
It’s critically important to start building a positive credit history when you haven’t yet been able to build up a substantial amount of capital. A strong credit score can give a beginning farmer a big boost when applying for farm loans. In essence, your credit score is a measure of your financial reputation. When you’ve established a strong credit score you’ll want to protect it like you would guard your reputation as a good farmer. It’s a building block for a successful farming career.
Paul Dietmann is the Senior Lending Specialist for Compeer Financial. For more insights from the Compeer team, check out compeer.com.