Farmers Not Exempt From Plastic Pressures
by Susan K. Davis
Imagine only receiving a paycheck a few times a year. Think about what you'd do if the money you're counting on doesn't come in.
That's exactly the situation many farmers face when the corn crop withers or the cows' milk dries up. "If the crop is bad or the weather does not cooperate, then there may not be enough cash to pay the bills," says Suzanne Badenhop, University of Kentucky Extension financial management specialist in Lexington. When the dough doesn't flow, pulling a credit card out of your pocket might seem like a good way to tide you over until the soybeans are harvested or heifers start producing milk. Instead of saving your life, credit cards could drown you in debt--if you don't calculate the cost.
To avoid mismanaging credit cards, the easy answer is to pay off the debt when the bill arrives. But farmers, like many consumers, fall into the credit card trap. When commodity prices plummet, some producers try to stay afloat by using credit cards to purchase feed, fertilizer, or even tractors. Badenhop notes: "If a farmer needs that tractor for his operation right now and he only has a short-term cash-flow problem, then using a credit card may be a viable alternative for a quick loan. But it should be paid back within the next 20 to 25 days." Otherwise, the farmer could be paying 18% or 19% interest on the debt.
For American families with at least one credit card, the average card debt is $9,205. A decade ago the average was $3,332, according to the Federal Reserve Survey of Consumer Finances. Credit card loans made by agricultural lenders totaled $200 million, compared with $365 billion for all credit card loans in the third quarter of 2004. However, not all ag bank loans are to farmers.
Farmers' credit card debt isn't singled out because the producers are like all shoppers. "Farmers are general consumers and are not typically any different than any other wage earners or self-employed individuals," says Dianne Jentz, business-lending manager at Heartland Credit Union in Platteville, Wis.
Farmers, like other consumers, could fall into the trap because credit cards are an easy way to cover expenses quickly, says Kevin Hauser, president, Westby Co-op Credit Union in Westby, Wis. In Iowa, James Jensen has seen farmers hop from card to card to cover costs. "If farmers had trouble getting credit, the cards were a way to finance fertilizer, seed, and family living expense," says Extension farm and business management field specialist Jensen. But a sign of misuse is a farmer putting operational expenses on a credit card instead of going through a traditional lender, says Jensen in Mt. Pleasant, Iowa.
Credit union credit card rates and fees generally are lower than banks'.
Paul Blausey's lender raises his eyebrows when he sees the $15,000 loan accumulated on several cards. "Every time I go for an operating loan renewal the bankers ask about the credit cards," says the Genoa, Ohio, farmer. The crop farmer uses the credit card line for both personal and business use in June before he receives a check for the wheat crop in July. "I can get 1.9% interest until the loans are paid off. Why should I pay these off and pay the bank 7%?" Blausey is conservative, watching the interest charges and using the cards as a cash management tool.
All eyes on the cards
Financial planners and lenders are scrutinizing credit card use. In the past, credit card debt wasn't included in a financial analysis, but has been added within the past several years, reports Iowa's Jensen. Wisconsin's Hauser looks at credit reports closer. "A completed financial statement may not show any credit cards--but the credit reports will," he says. Hauser looks for total debts, pyramiding debt, timely payments, and operating debt vs. long-term debt. At Heartland Credit Union, Jentz looks at all the creditors listed on the report. She also reviews payment history, credit limits, overlines (any cards that have or have had balances over the credit card limit), revolving credit limits, and credit scores.
Get an "A" in credit
Credit scores such as Beacon, Empirica, or FICO� (Fair Isaac Corp.) are based on items such as payment history, outstanding debt, and types of credit currently used. Credit card ratings are critical, especially for farmers. Credit card debt is unsecured; there isn't any collateral on the loan (such as a tractor) in case the borrower doesn't pay. If the credit card bill isn't paid, the default shows up on the farmers' credit rating.
Credit card applications are available everywhere from Badger to Buckeye football games. There are dozens, or even hundreds, of credit card sources today. "It used to be there were one to two banks where farmers went to borrow money and you could get a good overall financial picture," points out Iowa's Jensen.
Like everyone else, farmers like the convenience of not handling cash and retaining receipts. Farmers use credit cards to purchase seed or fertilizer or to pay veterinary bills, says University of Kentucky's Badenhop. Farmers are using credit cards more because merchandisers want to be paid at the time of service and not later, when the farmer has the money, Badenhop points out. And farmers often are ideal candidates for credit card companies because of their high equity in land and machinery.
The average credit card debt is $9,205 for American families with at least one card.
At the same time, many farmers do not use credit cards.
Watch for financial fallout
In times of disaster, drought, or disease, the credit card can seem like a quick fix. However, the signs of credit card crunch are when families can't pay their bills, only make the minimum credit card payment, and the credit card costs are more than 20% of their income, stresses Badenhop. (See the sidebar on how to calculate costs.) Or the problem might be you're borrowing more than you can afford. Although it might be cool to cruise through town looking Ford tough in your new truck, will your old clunker do?
Credit cards can be a critical farm tool to purchase hard-to-find parts online or make early season purchases of seed, fertilizer, or crop protection materials to obtain thousands of dollars in discounts. "Smart credit card users know they can pay the balance due at the end of each month and not have a carry-over balance that will result in paying interest on the account," Badenhop adds.
For Paul Blausey, the credit card is as useful as a wrench. "It's a tool ... as long as you're conscious of the consequences," Blausey adds. "The ones [borrowers] not using credit cards as a tool max out 10 cards and don't pay anything on the balance."
May 13, 2005
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