Understanding debt

You seldom hear the question, “Do you have enough debt?” The usual caution is having too much and being unable to make the payments. However, if your farm business is expanding, diversifying or transitioning to the next generation, debt is a tool to help you achieve your objectives. Attitudes about debt differ, but understanding it is key to using it properly.

Good debt or bad debt

There are countless stories about people maxing out their credit cards on consumer spending. If you’re using debt to buy fancy cars, a big boat or lavish holidays that you can’t afford, it’s a bad idea.

If interest payments on a loan are not tax-deductible, it’s a personal loan, not a business loan.

Not all personal loans are bad. Most people take out a mortgage to buy their home, but debt for a well-planned business purpose is different. If a loan makes your farm more profitable and sustainable in the long run, and if you have a solid repayment plan, it can be an essential business instrument. But, it’s ill-advised to pay for something beyond its useful life, like breeding stock and equipment. Like any tool, debt needs to be understood and respected.

Credit scores

As people have more and more access to credit, the need has grown for a comprehensive credit rating system to track individual performance. You’ve probably heard that everyone has a credit score based on their borrowing history, but you may only have a vague idea of how this works.

When you sit down with a lender and apply for a loan, you’ll grant permission for the lender to access your credit score. This rating reflects the relationship with your current creditors, including how diligent you’ve been in repaying as agreed.

Most people don’t realize that paying your cell phone bill late can reduce your credit score. In the same way, always making the minimum payment on your credit cards rather than paying off the entire amount owing can erode your credit rating. Credit scores improve if you maintain a record of paying on time and don’t appear to be over-utilizing credit. On the other hand, shopping around for credit at many places over a short time will hurt your score.

A lender is not supposed to share your actual credit score number but may ask about specific incidents. Be prepared to explain any negatives. There are often two sides to the story.

Late payments or collections can damage your rating for years. And credit rating history typically goes back at least six years. However, with diligent effort, you can improve your score.

The two national credit bureaus in Canada are TransUnion Canada and Equifax Canada. You can obtain a free copy of your credit report from each bureau. The credit report will not include your credit score but can be available for a small fee. The scoring system runs from 300 to 900. The higher the score, the better your rating.

Mistakes in credit reports and scores can and do occur, so it can be valuable to check this information at regular intervals... Read More