Spring, 2016: Many physicians rely on financing to purchase a house, car or perhaps even new equipment to expand their practice. The quality of your credit score can have major implications on several decisions regarding your business and personal financial plan. A good credit score not only makes it easier to secure favorable interest rates on loans, but it helps keep your insurance premiums affordable as well. It also makes renting a car or opening a checking account significantly easier. As your credit score improves, the potential opportunities to save money increase as well.
Typical day-to-day business activities that doctors face are capable of negatively impacting their credit score. For example, when you submit an application requesting credit, your score will be checked by the financial institution that would act as the lender. These hard inquiries (requested by someone other than yourself) can deduct from your credit score, some by as many as 10 or 15 points. Multiple applications in a short period of time can dramatically drop your score as well. If you’ve had an application turned down, it’s important that you raise your score and check with management about specific requirements and criteria before re-applying.
The good news is if your credit score is less than ideal, it’s possible to improve this relatively quickly. By wielding credit in a responsible manner, you can start to see improvements to your credit score within 30 to 60 days. Developing certain personal finance habits can really pay off by boosting your credit score which in turn lowers the cost of borrowing.
Getting the Complete Picture:
Your credit score is a measure of your creditworthiness that lenders use to judge whether you’ll be able to pay back debts. First and foremost, you’ll want to obtain a recent copy of your credit report so you can gain a complete picture of your credit history and standing. The three major credit bureaus (Equifax, Experian and TransUnion) are required to provide you with one free copy per year, so it’s entirely possible to receive a complimentary copy every four months so that you can check up on your credit throughout the year. You can request a copy of your credit report from annualcreditreport.com
A 2013 Federal Trade Commission study found that one in four consumers had errors on their credit reports that could affect their credit score. Mistakes happen, so if you see any errors when reviewing your credit report, dispute them immediately. Check for correct information regarding your identity such as the spelling of your name and your current address. Also, make sure that your proper credit limits are listed and that there are no fraudulent accounts that you do not recognize.
If you spot a mistake like a paid-off debt appearing as unpaid, contact the lender or creditor that reported the inaccurate information and ask them to update your account. The three major credit bureaus all have forms on their websites for submitting disputes as well. If neither of these options resolves the dispute, you can contact the Consumer Finance Protection Bureau (CFPB) and ask them to intervene on your behalf. A proactive approach to fixing errors on your report can give your credit score an immediate boost.
Factors to Be Aware Of
It’s nearly impossible to over-emphasize the importance of paying your bills on time. Your payment history, including the ones you pay late or skip altogether, is the single largest factor that influences your credit score. This component accounts for 35% of your FICO score. Accounts 90 days past due have a more negative impact on your credit score, so if you have multiple outstanding bills, prioritize them by paying off the most past-due accounts first and then gradually catch up on the rest. Using automated payments where possible can also help clean up your payment history.
The second most important factor to consider is your credit utilization ratio. This is the percent of available credit you’re using and accounts for 30% of your FICO score. The lower your utilization rate, the better your credit score will be. To calculate your rate, just divide your total credit balances by your total credit limits. Consumers with a credit utilization ratio of 10% or less will generally have a higher credit score than consumers with a rate over 20%. According to FICO, consumers with the best credit scores use just 7% of their revolving credit lines.
One simple way to lower your utilization rate is to request higher credit limits from your card issuers. Sometimes this happens automatically, but you can also make the request online or by phone. It never hurts to ask, right? You can even transfer a portion of one card’s spending limit to another card, provided that both cards are under the same issuer. However, this method is only effective if you don’t increase your spending habits in accordance with your credit limit.
Other Helpful Tips
Although it can be tempting to trim down a cluttered wallet, you should refrain from closing old cards when possible. This will cause your available credit to drop, which can set off a red flag with the bureaus. Approximately 15% of your credit score is determined by the length of your credit history. Closed accounts in good standing will remain on your report for about 10 years, but once removed will lower the average age of all your accounts and your score as well. One easy way to keep a card active is to use it for a recurring charge such as a utility bill.
Paying off medical school debt in full and on time can give your score a boost and demonstrate to future lenders that you can be trusted to handle money responsibly. This often isn’t practical for early career physicians, but utilization of an income-driven repayment plan can also free up your monthly payment commitments and increase your capacity to take on new debt, such as a mortgage.
Having a variety of different kinds of credit can be helpful as well. For example, you could buy that new bedroom furniture using a 12-month installment plan instead of cash. The important thing is to avoid any derogatory marks that could substantially hurt your score. Bankruptcy, foreclosure, accounts in collections, tax liens and other civil judgments could all have lasting consequences for your credit.
Creating a budget is an often overlooked, yet critical way to get your finances in order. Start by dividing your expenses into five different categories:
- Medical School Debt Reduction
Next, assign each category a percentage that is representative of your total income. In most cases, living expenses will account for at least 50% of your total budget. Besides living expenses, you should allocate a percentage of each pay check towards saving money, paying down outstanding debts and charitable giving. As long as the percentages are properly balanced, this simple method can make managing your finances a whole lot easier.
If you have a rating below 700, many of the aforementioned tips can be helpful in getting you back in good standing with creditors. You don’t need a perfect score of 850 to enjoy the best rates as a consumer. In fact, the Fair Isaac Corporation that calculates FICO scores estimates that only 0.5% of consumers achieve a score of 850. A score in the 720 range is usually sufficient for securing reasonable interest rates on loans. These strategies won’t instantly cure what ails your credit history, but if adopted by lenders they can certainly be effective in getting your report back on the right track.
Please contact your DWOQ advisor if you have any questions regarding your credit score and how it factors into your repayment strategy or career path.
Brandon Barfield is the President and Co-Founder of Student Loan Professor, and is nationally known as student loan expert for graduate health professions. Since 2011, Brandon has given hundreds of loan repayment presentations for schools, hospitals, and medical conferences across the country. With his diverse background in financial aid, financial planning and student loan advisory, Brandon has a broad understanding of the intricacies surrounding student loans, loan repayment strategies, and how they should be considered when graduates make other financial decisions.