THE POWER OF YOUR CREDIT SCORE Kelvin Ranck, Loan Officer
As you think about farm management and financials, one thing that can be easily forgotten or go unnoticed is your credit score. Your credit score should be viewed as a tool that can be used to borrow money for your home, farm, or equipment. It reflects your overall financial health and helps lenders determine how likely you are to make loan payments on time. Your credit score can also impact your interest rate for a loan.
HOW ARE CREDIT SCORES CALCULATED?
There are three consumer credit bureaus that collect and analyze credit information: TransUnion, Equifax, and Experian. These three agencies compile information on your open, closed, and cancelled accounts like loans, liens, judgments, and other public records. Farm Credit reports to the credit bureau. This means that when you get a loan through Farm Credit and as you make your payments, it creates and builds your credit score.
Credit scores have a range of 300 – 850 and use five factors in the scoring model: payment history, debt owed, average age of accounts, types of credit used, and new credit. The higher your credit score, the better. The average United States credit score is currently 711. Note: If you do not have a credit score, you may still be eligible for a loan with Farm Credit. We can use your tax returns, balance sheet, and other income and expense records to verify your repayment ability for a loan.
WHAT GOES INTO YOUR CREDIT SCORE? Payment History: 35 percent of your score. The history includes how many late payments you’ve had and how many days late the payments were made.
Amounts Owed: 30 percent of your score. This is your credit utilization (how much of your credit line was used).
Length of Credit History: 15 percent of your score. This includes how long your credit accounts have been established, the oldest, newest, and average age of accounts, and how long it has been since you used accounts. For example: if you paid off a loan ten years ago, that will not add to the strength of your score like a loan that was paid back one year ago. New Credit: 10 percent of your score. Opening several credit accounts all in one short period represents greater risk, especially for people who have only a short credit history.
Credit Mix: 10 percent of your score. This takes into account how many loans you have, and the types of loans they are. For example: an individual that has an equipment loan, a farm loan, and a Line of Credit (LOC) will have a better score than the individual only has an equipment loan. This is because there were multiple loans and multiple types of loans that were all paid on time.
FOUR WAYS TO IMPROVE YOUR CREDIT SCORE: 1. MAKE ALL LOAN PAYMENTS ON TIME
Thirty five percent of your credit score is calculated through your payment history. As you make your payments each month, the timing of these payments are recorded. Typically, payments that go 30 or more days past due are reported to the credit bureau, and can significantly damage your credit. When you make your payment on time, it causes your payment history to look better and therefore your credit score will increase as the months go by.
FICO CREDIT SCORE RANGES
RATING
<580
Poor
Your score is well below the average score of U.S. consumers and demonstrates to lenders that you are a risky borrower.
580 - 669
Fair
Your score is below the average score of U.S. consumers, though many lenders will approve loans with this score.
670 - 739
Good/Average
Your score is near or slightly above the average of U.S. consumers and most lenders consider this a good score.
740 - 799
Very Good
800 +
Exceptional
DESCRIPTION
Your score is above the average of U.S. consumers and demonstrates to lenders that you are a very dependable borrower. Your score is well above the average score of U.S. consumers and clearly demonstrates to lenders that you are an exceptional borrower.
