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Credit scores are a fundamental part of the credit underwriting process. Generally, a good credit score allows an individual to obtain credit, and on better terms, than would be available with a low credit score. A low credit score can severely reduce loan availability, with more credible lenders such as local community banks passing on a loan request categorically, leaving non-bank lenders with less desirable terms as the only financing option. This concept applies similarly to agricultural loans. Farmers, ranchers, and agribusiness owners must maintain a good credit score to secure favorable loan offers.
Understanding Credit Scores
If you want to boost your credit score to buy land or modernize your farming equipment, it’s vital to understand the basics of credit scores. According to Equifax, a credit score is a numerical rating that indicates an individual’s creditworthiness or a person’s qualification for financial assistance. They are commonly used by lenders, such as banks and credit card companies, to assess the risk of lending money to a person. Credit scores are calculated based on various factors related to a person’s credit history and financial behavior. According to Experian, a credit score ranges from 300 to 900. In general, here’s how each tier of score is viewed:
- Poor credit score: 300-579
- Fair or passing credit score: 580-669
- Good credit score: 670-739
- Very good credit score: 740-799
- Excellent or exceptional credit score: 800-850
Factors That Affect Your Credit Score
Here are some of the key elements you want to keep an eye out for that influence credit scores:
- Payment History: Your credit history is one of the most critical factors affecting your credit score. Lenders want to see a record of consistent, on-time payments. Late payments, defaults, or accounts sent to collections can significantly lower your credit score.
- Credit Utilization Ratio: This ratio compares the amount of credit you currently use to your total available credit. It’s calculated by dividing your credit card balances by your credit limits. Keeping your credit utilization ratio low (typically below 30%) is generally recommended for a good credit score.
- Credit History Length: The length of your credit history is another influential factor. A longer credit history allows lenders to assess your credit management behavior over time. It considers factors such as the age of your oldest account, the average age of all your accounts, and how recently you’ve used them.
- Credit Mix: A healthy mix of different types of credit — such as credit cards, loans, and mortgages — can positively impact your credit score. It demonstrates your ability to handle various credit obligations responsibly. However, it’s important only to take on credit that you can manage comfortably.
- New Credit Inquiries: When you apply for new credit, such as a loan or credit card, lenders typically pull your credit report to assess your creditworthiness. These inquiries are recorded on your credit report and can momentarily lower your credit score.
Significance of Good Credit Score for Agricultural Loans
Having good credit is crucial when applying for agricultural loans. Here are some reasons why good credit is significant in the context of agricultural loans:
- Lower Interest Rates: Lenders determine the interest rates for agricultural loans based on the borrower’s creditworthiness. A higher credit score often translates to lower interest rates. Good credit makes you more likely to qualify for favorable loan terms, including lower interest rates.
- Higher Loan Limits: A good credit score enables you to access higher loan limits. Lenders are often willing to lend larger amounts to borrowers with a proven track record of responsible credit management. This can benefit agricultural operations that require substantial funding for equipment purchases, land acquisition, or expansion.
- Flexible Financing Options: Good credit offers a broader range of financing options. It allows you to explore different loan products and lenders and find the best fit for your specific agricultural needs. With a strong credit profile, you may have access to specialized agricultural loans with favorable terms and conditions tailored to the industry.
Steps To Improve Your Credit Score
If you want to attain the credit score needed to buy land, here are some steps you can take:
- Review Your Credit Reports: Start by obtaining free copies of your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion). Review the descriptions carefully and check for errors. If you find any, dispute these errors with the credit bureaus to have them corrected.
- Pay Bills on Time: Payment history is a significant factor in credit scoring. Make it a priority to pay all your bills on time, including credit card, loan, and utility bills.
- Manage Credit Card Usage: High credit card balances concerning your credit limits hurt your overall credit score. Try your best to maintain a credit card use ratio of less than 30%.
- Manage Credit Accounts: Be cautious about opening new credit accounts unless necessary. Opening multiple accounts within a short period can raise concerns for lenders.
- Establish a Solid Payment History: If you have a limited credit history or a few negative marks, focus on establishing a solid payment history. Consistently making on-time payments over time demonstrates responsible credit management and can improve your credit score gradually.
Apply for an Agricultural Loan Today
Agricultural loans and credit scores are inseparable. Without establishing and maintaining a favorable credit score, you’re limiting yourself to potential borrowing opportunities. If you’re interested in financing your agricultural operation, contact our team and find the perfect loan solution for your unique needs.