Credit scores, smedit scores. You don’t need to concern yourself with them. After all, credit scores are a consumer issue, and you own a dairy.
That kind of thinking can cause you trouble in a hurry. Your ag lender has developed a keen interest in this measure in recent years. Lenders like to use credit scores because they believe these tools can provide the best guide to future risk, as well as provide a quick, objective measure of your past financial performance.
These scores can change over time — up or down — so you need to know how you and your business rate, the impact these scores have on your business and how you can affect your score. And, sometimes, the information used by credit bureaus to calculate these scores is incorrect.
Therefore, use the following steps to learn how to influence your credit score in a positive manner.
Step 1. Find out if your lender uses credit scores.
As noted in the November issue of Dairy Herd Management, lenders use credit scores differently -— or sometimes not at all. Remember that credit scores are based on a proprietary mathematical equation that helps estimate your future risk based on the data contained in your credit report. Lenders use credit scores to determine your probability of repaying a loan, explains Mike Swan,
So, your first step is to find out whether your lending institution uses this tool. To do so, simply ask your lender if he uses credit scores or not.
Step 2. Ask what procedure your lender follows.
Once you determine that your lender uses a credit-scoring system, then ask him to share the system with you, recommends Gary Sipiorski, president of Citizens State Bank, Loyal, Wis. Ask him, “How do you come up with that score?”
For instance, does your lending institution have its own scoring system? If it does, find out which financial measures it uses to calculate the score. Also, question what the score means to your lender. Ask what’s considered a good, average or poor score.
Then find out whether your lender uses three-digit FICO scores developed by the Fair Isaac Corporation, and how much weight these scores carry. These scores may be used in lieu of an individual lending institution’s specialized scoring system or in addition to it.
Keep in mind that FICO scores carry different weight based on your dairy’s business structure. If you are a sole proprietor, for example, FICO scores have a more direct impact than if your dairy operates as a limited liability corporation.
If you use multiple lending institutions, ask each one to define its credit-scoring procedure.
Step 3. Identify positive influences.
Next, discover score influencers. Credit scores do not remain the same forever. They are a moving target based on your financial performance.
Ask you lender to provide your current score and determine where it stacks up in the lending institution’s scoring system. Then, inquire what you can do to make your score better — or how to keep it high, if it’s already there. Ask questions like:
What should my ownership equity be? Is there an acceptable range?
Where would you like to see cost of production? Is there an acceptable range?
“I have no problem sitting down with a producer to have an open, honest conversation about what they need to do financially or indicator-wise to positively influence their loan,” says Tony DeRose, executive vice president of Wells Fargo Bank in Visalia, Calif. “At the very least, I expect them to know their cost to produce 100 pounds of milk.”
In addition, follow practices that will improve or retain higher FICO scores, such as:
On-time bill payment.
A low number of past-due items on file.
Low credit card balances.
A low number of credit lines in use.
Open new accounts only when needed.
Reduce the number of credit inquiries.
“Raising your score is like losing weight,” says Swan. “It takes time, and there’s no quick fix.”
Step 4. Check your credit.
Regularly check your personal credit score with credit bureaus.
Contact the credit bureaus listed above at least once a year to obtain your credit score, as well as a full credit report. Correct any errors immediately.
Check your personal credit score
Personal credit scores, or fico scores, are provided to your lender by three major credit-reporting agencies. Here’s how you can contact those services and investigate your credit score for yourself:
1. Equifax. Call
2. Experian. Call
3. TransUnion. Call
In addition, you also can get a copy of your credit score at: www.myfico.com
Use credit reports to keep track of your credit
You want to make sure your lender has the most accurate information possible when he evaluates you and your business for a loan. While you have control over the validity of the financial data that comes directly from your operation, you do not have the same influence over that from personal credit reports bought to lenders from credit-reporting agencies. Therefore, you need to make sure that this information is accurate. To do so:
1. Obtain a copy of your credit report.
Using the contact information above, contact at least one of the three major credit bureaus to get a copy of your personal credit report. Experts recommend that you obtain a copy of this report once a year.
2. Review it for accuracy.
Carefully go over the report. Check for errors; make sure that it truly reflects your financial history.
3. Correct any errors.
Contact the credit bureau in writing if you note errors. Use your records of credit card or other credit transactions — like vehicle or equipment payments — as proof of payment in the event of a dispute.