Lenders look at a long list of factors when reviewing applications for agriculture loans. One crucial element is your credit score, which can tell them a lot about your spending habits and financial health.
This numerical representation of your financial history lets lenders assess your spending habits and overall financial health — and therefore your creditworthiness. They will analyze your past borrowing and repayment behaviors to evaluate the likelihood of you repaying the loan as agreed.
It’s crucial for anyone applying for agriculture loans to understand why lenders place such importance on credit scores and how to make this score higher to get better loan terms.
Understanding your credit rating and why it matters
Credit bureaus use complex algorithms and various scoring models (such as VantageScore and FICO) to calculate your credit score. Specific factors and their weightings vary, but in general, the following factors will influence your number:
- Payment history – Do you make timely payments on your credit cards and loans?
- Credit history length – Having a longer credit history demonstrates responsible financial behavior over time and can boost your score.
- Credit utilization – This is the amount of credit you’re using compared to your total available credit. So if you have a credit card with a $1,000 limit and you’ve charged $300, your credit utilization ratio is 30%. Keeping your credit utilization ratio low (ideally below 30%) can improve your score.
- Credit mix – Having a diverse mix of credit accounts (e.g., credit cards, auto loans, mortgages) can positively impact your score because it shows lenders that you can manage different types of credit responsibly and that you can handle various financial obligations.
Understanding the factors that directly contribute to your credit score lets you take proactive steps to improve it, so you can secure favorable terms on agriculture loans and other financial products.
Why credit scores matter to agriculture lenders
Agriculture is a volatile industry that’s often affected by unpredictable market fluctuations and natural disasters. To mitigate risk, agricultural lenders rely on credit scores to assess your financial reliability. Having a strong credit score tells them that you can repay your loan as scheduled even during challenging agricultural conditions.
Interpreting your credit score: What does it mean?
Your credit score is a reflection of your financial responsibility and a track record of your ability to manage available credit.
A higher score tells lenders that you have a solid credit history, are less likely to default on agriculture loans, and can make timely payments. As a result, you’re more likely to get approved for a loan and get the best terms, such as an extended repayment period and lower interest rates.
In contrast, a lower credit score may raise red flags to agriculture lenders. It may indicate a high credit utilization or a history of missed or late payments, so lenders may perceive you as a higher-risk borrower as a result.
Can you have a low credit score and still get an agriculture loan?
It’s possible to get approved for agricultural loans even with a low credit score, but you might get shorter repayment periods and higher interest rates.
Lenders have a minimum credit score requirement but it’s not set in stone. If yours is lower than their threshold, try negotiating with them. Disclose any extenuating circumstances that may have impacted your score, such as unexpected financial setbacks, medical emergencies, natural disasters, or other significant life events. Explaining these factors may help the lender understand your situation and potentially improve your chances of loan approval.
Lenders are more compassionate than you think
Many agriculture lenders will take the time to hear out the reasons behind your low credit score. They understand that unexpected events (especially natural disasters or expensive medical issues) can negatively impact credit history. So don’t be afraid to talk to them. Be honest and transparent about your situation to help lenders assess your creditworthiness more accurately.
How farmers and agribusiness owners can improve their credit scores
Ultimately, your credit score reflects how responsible you are in using credit, and a better score increases the chances of approval for agriculture loans with the lowest possible interest rates. How do you boost this number? There are some things you can do:
- Check your credit reports.
Before anything else, review your credit history from all 3 major credit bureaus: TransUnion, Experian, and Equifax. You’re entitled to get a free copy of these reports from each bureau once a year.
- Check sparingly!
It’s good practice to review your credit score regularly to look for discrepancies or errors. But be careful to use only soft inquiries to avoid negatively impacting your score. You can also try signing up for free credit monitoring services if your bank offers them.
- Avoid late payments.
FICO scores are used by more than 90% of leading lenders for credit decisions, and your payment history is the largest factor used in computing this number, accounting for 35% of your total score. This is why paying your bills on time is the single best thing you can do if you want to boost your creditworthiness. Here are a few tips:
Use a digital or paper filing system and update it regularly.
Set alerts for due dates so you don’t forget them.
Automate bill payments from a bank account.
You can also charge all or some of your monthly bill payments to your credit card, but make sure to pay the full balance each month to avoid interest charges. This strategy can simplify bill management and potentially improve your credit score — but only if you’re sure that you can maintain a consistent record of timely payments.
- Use less credit.
Credit utility makes up 30% of your FICO score — it’s the second most critical factor in determining your credit rating. It’s worth the effort to keep your usage in check by paying balances in full monthly.
Of course, it’s not always feasible, but you can at least try to maintain a total outstanding balance of 30% of your credit limit or less. Then, you can work towards reducing your credit utilization down to 10% or less to raise your credit score and improve your chances of securing agriculture loans.
- Build your credit history.
You may have difficulty establishing a credit score if you have a limited credit history (known as a “thin credit file”). The good news is that you can use services like Experian Boost and UltraFICO to build credit. These services allow you to include positive payment history from utility bills, rent payments, and other non-traditional credit accounts into your credit report — additional data that can potentially improve your credit score.
- Maintain older accounts and address delinquencies.
Keep older credit accounts open (even if you’re not actively using them) because an older average credit age makes you look good to agriculture lenders. Be sure to resolve delinquent accounts, including collection accounts and charge-offs.
- Try debt consolidation.
Debt consolidation combines multiple debts into a single loan with a lower interest rate to simplify your finances and make it easier to keep tabs on your bills. This can help you pay off debt faster and improve your credit utilization ratio to boost your credit score.
- Track your progress with credit monitoring.
As you make an effort to improve your credit score, you’ll naturally want to see how far you’ve come over time. Free credit monitoring services can help with that. Once you’ve made significant progress in improving your credit score, you can then re-approach lenders to discuss your eligibility for agriculture loans.
Should you ask for an increase in your credit limit?
Raising your credit limit can potentially lower your credit utilization ratio for as long as your spending habits remain responsible.
You can request a credit limit increase from your credit card issuer online or by phone. Be prepared to provide updated financial information (such as your most recent income and employment status).
Beware of hard inquiries and requests for new credit
Soft inquiries (such as when you check your own credit or when a potential employer pulls your report) have no impact on your credit score.
Hard inquiries, on the other hand, can temporarily lower your credit score. These occur when you apply for new credit — like a credit card, auto loan, mortgage, or even a farm loan. Multiple hard inquiries within a short period can signal to lenders that you may be experiencing financial difficulties, which may make it harder to secure loans and increase interest rates. It’s best to limit hard inquiries especially while you’re working to improve your credit score.
Warning: Opening new credit may lower your score
Your credit score could plummet temporarily if you open new credit accounts. This happens because:
- When you apply for a new credit account, the lender pulls your credit report (a process known as a hard inquiry). Multiple hard inquiries within a short period can signal to lenders that you may be experiencing financial difficulties.
- Opening a new credit account also lowers the average ‘age’ of your credit history, which as we mentioned is an important factor in credit scoring models.
That said, while opening new credit can temporarily impact your score, the long-term benefits of responsible credit use may outweigh the short-term drawbacks.
Do you need an agriculture loan as soon as possible?
As you can see, improving your credit score takes time. What if you need to secure agriculture loans urgently? Private Capital Investors can help as they are expert private commercial real estate lenders.
While a strong credit score is ideal, our experts can explore alternative funding options to meet your agricultural financing needs. Call us at 972-865-6206 or send a message to info@privatecapitalinvestors.com to reach out and discuss your situation.
