Building a Good Credit Score for Ag Financing

Most young or beginning farmers have the passion, energy and strong work ethic needed for a career in agriculture. The challenge is building the capital necessary to receive Ag financing, cover a down payment on real estate, buy equipment, or livestock.

The problem is, it’s a chicken and egg scenario. In order to obtain the funds to start farming, a beginning farmer is probably going to have to get a loan. In order to get a loan, he or she needs a good credit score.

Credit score basics
In essence, your credit score is a measure of your financial reputation.  A “credit score” is a number that indicates a potential 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 a credit bureau.

In the United States there are three major credit bureaus: Experian; TransUnion; and Equifax.  They routinely gather payment information regarding millions of people from lenders, credit card companies, utility companies, court records and other sources. They only gather information related to debts; no other data is collected by them.

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.  The report also shows how long each credit relationship has been in place.  If a credit relationship has ended, it will show whether the relationship was terminated by the borrower or the creditor.  A complex mathematical formula developed by the Fair Isaac Corporation (FICO) is used to derive a FICO credit score from all of the info on the credit report.

What do the scores mean?
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 that 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 annualcreditreport.com or call 1-877-322-8228.

Building a good credit score
So how does a young person with a limited or blemished credit history build a good credit score? 

1. 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, accounting for 35% of the total.
2. Use no more than 30% of your available revolving credit.  In other words, if you have a credit card with a $10,000 limit, don’t run up a balance of more than $3,000 on the card even if you pay the balance in full every month.  If you need to use more than 30% of your limit, request an increase in the limit on your current card; don’t open a second credit card account for the overage.  How much money you owe in relation to your available amount of credit, your “credit utilization ratio,” accounts for 30% of your FICO score.
3. 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% of the FICO score.
4. 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% of the FICO score. 
5. 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.
6. If you’ve had trouble getting credit due to issues in your credit history, consider opening a secured credit card account.  A secured credit card requires the cardholder to make a cash deposit as collateral to secure the account.  Typically the credit limits on these accounts are low and are tied to the amount of cash the cardholder is able to deposit on the account.  The main purpose of these cards is to build a positive credit history.
7. With this discussion of credit cards it’s important to caution against using credit cards as the source of operating capital for your farm.  Credit card balances carried from one month to the next accrue a high rate of interest, can quickly damage your credit score, and significantly increase the likelihood of financial failure.  Get your farm’s operating credit from a reputable agricultural lender.
8. 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.

If you don’t have a substantial amount of capital and your goal is to farm on your own, building a positive credit history is critical. A strong credit score can give a beginning farmer a big boost when applying for farm loans. And, once you’ve established a strong credit score, protect it like you would guard your reputation as a good farmer. A successful farming career is nearly impossible without it.