Understand how lenders evaluate your loan application
Farm lenders increasingly use FICO credit scores as a key criteria for determining not only whether you qualify for a loan, but terms and interest rates.
"FICO is a tool we use to evaluate risk," says Mark Jensen, senior vice president for risk management of Farm Credit Services of America.
Additionally, FCS looks at a producer’s balance sheet, cash flow and other risk predictors. A FICO credit report is pulled for each loan application, whether for a new borrower or a 30-year customer. "FICO scores have proven reliable as a solid predictor of risk," Jensen says.
Credit deals involve more than just rates. Good terms are equally important, and FICO scores above 720 put you in a stronger position to negotiate them. Scores range from 300 to 850 and include virtually all credit, regardless of source.
"Right now, 85% to 90% of our borrowers are 700 or better," says Nate Franzen, First Dakota National Bank president, agribusiness division.
Lower scores don’t necessarily mean a credit lock-out. "We might make loans to those below 650 if they are making financial progress, have a plan and a sound reason for the score, but the terms will not be as favorable," Franzen says.
Average FICO scores for farmers are 750 right now, compared to 690 for all borrowers, illustrating record farm incomes the past few years.
FICO gives more weight for certain borrowers, even within the same institution. "The scores weigh more heavily in decisions for beginning farmers and for new customers," Jensen says. The point in time is an important consideration, too. If a cash grain producer has lower scores today, it’s more troubling to lenders.
FICO calculation models are closely held trade secrets, but the percentages assigned to each risk category are straightforward, as the pie chart above shows. An oxymoron, perhaps, but even closing accounts on which you owe nothing can hurt your score, as well as applying for too much credit from numerous sources within a short time.
Pull Reports. FICO is best known by its three reporting agencies: Equifax, Experian and TransUnion. It’s advised to obtain scores annually from all three. This allows you to spot inaccuracies and correct them. A comparison by Consumer Reports found a 72-point spread among the agencies, which could be the difference between good and excellent. That range doesn’t mean a change in rates or terms, but it could.
Credit scores are most regarded as a tool for looking at credit card debt. Farmers are making more purchases with credit cards than ever before, Jensen says, because they are making more online purchases.
Almost all farmers have been through high and low cash flow cycles. If there’s something on your credit report that might raise credit suspicions, it’s important to be up front with your banker, advises Bob Craven, University of Minnesota ag economist. Credit score glitches that can be explained do not necessarily pose a big problem, he says.
While there is little that can be done to change the past, you can change the future, so whatever your history, staying current on payments will boost FICO scores over time.
For more information and to order any of the three FICO reports, check out www.myfico.com.
- September 2013