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Do you know your current credit score? Do you know what you have done today, this week, or even this year that has affected that score? Many doctors don’t realize that their spending habits as residents and fellows can affect them when it comes time to buy their dream homes later on.
Today, we’ll cover seven tips to avoid a bad credit score and/or to help rebuild your score if you’ve already made some of these mistakes.
At MD Financial, we like to avoid any surprises when it comes to our clients’ financial futures. One thing doctors don’t often think about is their credit score. Credit scores are extremely important in the home buying process. A lower score could mean higher interest rates on a mortgage, leading to higher monthly payments and paying significantly more overall for your mortgage. Credit scores can also come into play if you are financing a big ticket item, like a car.
Know your score
Scores are on a scale between 300 and 850.
According to FICO [1], the score is broken up as such:
35% Payment History | 30% Amounts Debts Owed | 15% Length of Credit History |
10% New Credit | 10% Types of Credit Used
Unfortunately, there are no breaks for being a physician or earning a higher salary.
How do you know if your credit score is good?
The goal is to have your score well over 740. This will help get you the best interest rates for loans.
Where can you find your credit score?
There are plenty of options out there to check your score for free.
It’s becoming more common that banks offer a free credit check once a year. If your bank does not, we suggest freecreditscore.com.
We recommend checking your score once a year to verify its accuracy, even if you do not foresee any loan or home purchases in your future.
Consider a credit monitoring service to track any major changes that may not be correct. These have the added benefit of alerting you if your identity has been stolen and someone is opening credit under your name.
Can you check your score too much? If so will it reduce your score?
This is a common misconception. There are two types of inquiries- soft and hard inquiries.
Soft Inquiry: When you check your own score, this does not impact your score at all. Sometimes lenders will do a soft inquiry to get you a quote or pre-approval.
Hard Inquiry: Most of the time lenders use hard inquiries to check your score. This will temporarily lower your credit score. Hard Inquiries can be a problem if you are refinancing a loan and having numerous lenders check your credit at the same time.
Make sure to verify if a company is going to do a soft or hard inquiry before approving them to do so.
2. Build Credit with a Credit Card
Positive payment history is key here.
Start with one credit card; multiple credit cards can damage your credit.
If you are unable to get a card, try department store cards or cards made for people with lower credit.
Expect high interest rates with the department store cards.
Pay off the cards each month to demonstrate positive payment and avoid the high rates. This is good advice for any card. Pay it off every month.
Set up an auto-payment if you find yourself struggling to remember to pay.
3. Build Credit with a Secured Card
If you are having trouble getting a credit card, a secured or debit card can also help. Work with your bank if you are interested in getting a secured card.
Secured cards require a security deposit up front, so you are using the funds you have already deposited, similar to a debit card.
Make sure to know how much you have in your account while spending to avoid high overdraft fees.
4. Avoid Bad Credit Behavior
Some examples of bad credit behavior are: Late/missing payments, maxing out cards, carrying high balances, etc.
We recommend never carrying a balance on credit cards, but we know that is not always possible. When you do, it’s advised to keep this under 30%* of your available credit. The lower the percentage, the better.
Your credit score will get docked if your debt to credit ratio is too high.
5. Keep Good Credit Accounts Open
Credit scores look at the length of good credit accounts- the longer the better.
If you have a card with a good credit history, keep it open, even if you never use it.
6. Watch the Number of Cards
While you want to keep good credit cards open, you do not want to have too many cards. The right number seems to be 4-5 per household, according to some experts.
Avoid switching cards often.
We know the 0% APR deals can be tempting, especially if you are carrying a high balance, but constantly applying for and opening new cards can be detrimental to your credit. Remember, credit scores look at the length of credit history you have.
7. Reports Errors
Any errors you find on your credit report can be disputed by contacting the credit bureau that shows the error.
Each bureau has an online form for reporting and tracking these disputes.
The bureaus have 30 days from receiving your dispute to examine the claim.
You can find the dispute forms at each of their websites: Experian, Equifax, and TransUnion.
Credit scores can be hard to maintain for doctors going through training but may be essential in getting that home or car you’ve been dreaming about. Don’t let a low score surprise you when it comes time to finance a big ticket item. Start today by building, monitoring, and maintaining your credit score. Even if you aren’t in the market for these big purchases yet, you want to make sure you are prepared when the time comes.
[1] https://www.myfico.com/credit-education/whats-in-your-credit-score
* Podcast says 75%, but we recommend much less.
If you found this helpful, please forward it to colleagues and remember to follow us on social media. We’re always accepting questions/topics for future episodes of our podcast, so write in or call with your suggestions. Finally, you can reach out to us directly for a second opinion on your financial health, by emailing us at Info@mdfinancialadvisors.com.
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Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.