6 minute read
The Power of your Credit Score
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.
Tip: Set your loan payments up on automatic payment. This will allow your payment to be made on time each month without having to remember or physically go to the bank. With Farm Credit’s AutoDraft program, a loan statement is still mailed to you each month, showing all the details of your upcoming payment and when it will be automatically drafted from your bank account.
2. KEEP GOOD DEBT WITH COMFORTABLE LOAN AMOUNTS
Do not immerse yourself in lots of consumer debt. Although the action of getting loans and paying them back can build your credit, when lenders look at your credit report and see many open accounts or loans that are currently being paid down, they may doubt your ability to make payments on yet another loan.
3. USE ONLY A PORTION OF YOUR CREDIT LIMIT
If you utilize an Operating Line of Credit (LOC), use only a portion of the LOC. When a lender looks at your LOC history and sees that you’ve had your LOC fully drawn for the past year, they may doubt your financial strength and ability to pay the bills that you have. At some point during each year, make sure to pay your LOC down to zero. This shows a lender that you are profitable as a farm and able to handle another loan payment.
4. LIMIT OPENING SEVERAL NEW CREDIT ACCOUNTS
If you’ve opened several new credit accounts over a short period of time, this will reduce your credit score. Too many new accounts or new inquiries can indicate higher risk to the lender. The credit bureau tracks both new loans and new inquiries. An inquiry occurs when you apply for a loan and the lender pulls your credit report as part of the application process. Each inquiry typically results in a small reduction of your score for a time, although there is a provision that allows you to apply with multiple lenders for a single loan request without having your credit score docked multiple times.
Note: It is ok to request and check your own credit score. When you order your own credit report from a reporting agency or an authorized organization, it will not affect your credit score.
In summary, your credit score can be a powerful tool to help you get loans to finance your farm’s growth and fuel new purchases. Your credit score is determined by a number of different factors, but the most impactful factor for your credit score is your timely repayment of existing loan accounts. Making your loan payments today impacts your ability to get good loans in the future with competitive interest rates.
Give us a call today at 888.339.3334 or visit www.mafc.com if you’d like to discuss your credit score and financing options.
Article written by Kelvin Ranck, Farm Credit Loan Officer
