Start building credit now to make big purchases in the future
As a young producer, you’re likely seen by lenders as a financial risk. Your net worth is probably low and your credit score could be almost nonexistent. Knowing how credit is determined and how to improve your standing can be valuable as you start buying land, machinery and other inputs.
Dick Poe, senior vice president of financial services for Farm Credit Services of Mid-America, says it’s never too early to lay the groundwork for a strong credit history. To determine credit risk, lenders often buy a credit report and credit score from a credit reporting agency.
The credit report includes your type of credit (credit cards, loans, mortgages, etc.), credit limit,
account balance, payment history and bankruptcy history. Credit scores (usually between 300 and
850) are based on the details in your credit report. Lenders use the score to determine their level of risk when lending to you. Typically, the higher the score, the lower the risk.
Establish a healthy credit history by taking out a small loan that can easily be paid back, Poe says. "It’s much easier to ask a lender for $25,000 than to ask for money to buy thousands of acres," he says.
Don’t be discouraged if you have a few black marks on your credit history. "You’ll just need to explain why and show how you can improve it," Poe says.
A business plan may be proof enough. "When young farmers come to the table, they don’t bring a
lot of strength, because they don’t have many assets. Components such as financial statements, business plans and family support become much more important."
Poe advises multigenerational farm families to involve younger partners in the financial decisionmaking process early, so they can begin to understand the farm’s financial standing.
Additionally, young farmers can start to develop a relationship with their lender. Poe says, "You don’t want a lender who just says yes or no, but someone who partners with you as you start to make decisions—someone who can grow with you and challenge you."
Develop valuable financial habits
Controlling your debt and making payments on time are the best ways to build and maintain a strong credit history. To keep your credit in goodstanding, Wells Fargo provides these tips:
Establishing a good relationship with a lender early on is an important
first step in laying the groundwork for credit.
• Pay at least your total minimum due each month.
• Always pay your bills on time, to avoid additional fees.
• Check your credit card statements and bills for any discrepancies. If found, report them immediately.
• If possible, keep at least a 15% cushion of available credit in your account.
• Follow the "20-10" rule. Limit your total debt to less than 20% of your total income. Each month, less than 10% of your net income should go toward paying off credit card bills. If you’re paying more, reconsider your spending.
• Avoid using cash advances. They are the most costly way to use credit, since you will pay higher interest rates and fees for cash than for purchases.
You can check your credit score for free, once a year, at www.annualcreditreport.com. To check it more often, you’ll incur a small fee.
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