A credit score is used as a proxy for your ability to fulfill your financial promises. It is often used to influence the terms of a loan, employment or rental agreements and other things such as the favorability of interest rates or terms of insurance offered to you.
Unfortunately for medical students, residents, and fellows, being a future high-income earner has no bearing on your credit score, as it is based entirely on your credit history.
Your credit score is a work in progress. Focusing on just a few things as outlined below can make a big impact.
From securing loans like a mortgage, credit cards and auto loans to an offer of employment or a rental property, and even some types of insurance coverage, your credit score can be used for a variety of purposes. At its essence, a credit score is used as a proxy for your ability to fulfill your financial promises, and it can be used to influence the terms of a loan, employment or rental agreements and other things such as the favorability of interest rates or terms of insurance offered to you.
Future income levels of doctors in training unfortunately have no bearing on residents’ credit scores. Your score is based on history, not the future. Accordingly, it’s important to know what factors affect your score, especially for residents, fellows, and early-practicing physicians.
There are two primary credit scoring models, VantageScore and FICO, that credit bureaus utilize to standardize the scoring methods. With FICO, perhaps the more recognized of the two, there are five basic attributes that contribute towards your score.
Here they are in order of their influence from largest to smallest:
Payment history (35%): How regularly and timely you pay your bills and loan payments affects your score more than any other category. It seems simple, but paying your bills on time each month is the single biggest lever and path to a better score. This is also something you should validate and promptly correct each time you notice an error on your credit report. More on that later.
Debt level or credit utilization (30%): The overall amount of debt you carry, the ratio of credit balances to credit limits, and current loan amounts relative to your original loan amounts all combine to make up what is known as your credit utilization. A good rule of thumb for this category is to keep your credit usage at 30% or less, meaning you should try to limit your usage to less than 30% of the credit readily available to you.
Credit history age (15%): Your “credit age” is a composite of the oldest credit account you have as well as the average age of all credit accounts. Having an “older” credit age is better for your score since it indicates you have a longer tenure of experience handling your obligations.
Types/mix of credit (10%): Not all credit accounts are the same. Some, like credit cards, are known as “revolving” lines of credit which may have variable terms, payment amounts and interest rates, whereas “installment” loans, like a mortgage, tend to be more consistent and may have a fixed term, rate, and payment. Having experience with multiple types of credit accounts for a variety of purposes can positively influence your score.
Credit inquiries and new accounts (10%): Each time you request credit, the lender inquires about your credit score. Having one or two inquiries over a 12-month period shouldn’t hurt your score, but multiple inquiries over a short period of time can drop your FICO score.
Credit scores are not affected by your age, marital status, income, bank account balances, any investment account balances.
According to Experian data from September 2021, the average FICO score in the United States rose slightly to 714 in 2021, but where does that stack up against all consumers?
FICO, as well as VantageScore, establishes ranges from “Poor” to “Excellent” across several models. For base FICO scores, those ranges are as follows.
Very Good: 740-799
While the average is 714, approximately 1.2% of Americans have achieved the exceptional score of 850 while an estimated 12% of Americans have scores in the “Poor” category.
Average credit score by age group as reported by CompareCamp was:
If your score is above or below these benchmarks, resist the urge to conclude anything from these statistics. What’s important for you to focus on is the trend and what is within your control.
Unfortunately for medical students, residents, and fellows, being a future high-income earner has no bearing on your credit score, as it is based entirely on your credit history. Additionally, physicians in training and early practicing physicians may have low scores even if they have normal spending patterns. High amounts of student debt, among other things, can contribute to these lower scores.
Nevertheless, there are a few things you can do to help improve your score. Your credit score is a work in progress and focusing on just a few things can make a big impact.
Get a copy of your credit reports (regularly): You are entitled to a free copy of your credit report from each of the major bureaus every 12 months. You do not have to get them from each of the bureaus all at the same time, so consider staggering your requests throughout the year. That way, you have a regular and periodic way of monitoring activity and can respond to any issues in a timely fashion. Go to AnnualCreditReport.com for more details.
Dispute any and all errors: You are similarly entitled to an accurate credit report under the Fair Credit Reporting Act. This right allows you to dispute any errors by writing to the relevant credit bureau. They have an obligation to investigate the dispute within 30 days.
Errors can arise from data entry errors by creditors such as, mistyping Social Security numbers, birthdays, addresses or outright identity theft. These types of errors will likely be accompanied by credit entries or balances you don’t recognize or didn’t originate. A second common error type may be found in your payment history. Payments that you made on time but were marked as late have a negative impact on your score and can be disputed and corrected.
Paying your bills on time: Since 35% of your score is calculated from your payment history, you can increase your score with almost any budget simply by making sure you pay on time.
Get caught up: Past-due balances can have a “double whammy” effect on your score. Your credit utilization remains higher, or even grows, and you experience a negative impact on your score from missing or being late on payments. Those two categories account for 65% of your score, so some focused attention on getting caught up can move your score quite a bit by making the “double whammy” work for your benefit. If you are behind on payments, don’t be afraid to call your creditors. In many cases, there are temporary hardship programs that can accommodate your situation and give you time to get back on steady ground.
Minimize your credit utilization: Again, at 30%, this category can have a large impact on your overall score. First work on limiting your use of new credit and then focus on paying down your credit balances to below 30% of the overall credit limit. If you are a resident on a budget already stretched thin, this may be more difficult, but there are strategies that work on most budgets. Check out our guides on Managing Medical School Debt and Debt or Invest as well as our Debt Infographic for more ideas.
Keep debt-free accounts open to demonstrate length of time: As you minimize and pay off debt mentioned above, such as a credit card, consider keeping that account open with a zero balance, especially if it is an account you’ve had for some time. Having a zero balance will lower your credit utilization (a 30% category) and keeping a long-standing account open will have a positive influence on your “credit age” (a 15% category).
Don’t open or apply for new credit and applications unless necessary: Even though it’s only a 10% category, new credit and new applications move your score lower. Any application for new credit is known as a “hard inquiry” which is a credit review that is visible on your credit report and impacts your score. This is especially important if you are trying to repair a bad credit score or applying for a mortgage where final approval may take some time and any hard inquiries could affect your loan terms or even overall qualification.
Be patient and remember to take slow and steady wins: Credit scores are not formed, repaired, or improved overnight. Many of the categories that comprise your score take years to establish. This can be discouraging if you are in repair mode, but it can also be encouraging to know that simple good practices and habits, patience, and persistence tend to win the long race and that a momentary setback isn’t a conclusion.
Consider physician-specific lending products: The creditworthiness of doctors in training is often not fairly represented by their credit scores. You shouldn’t be penalized for the investment you have made in your career. Yet, this is often the case in the underwriting processes of traditional lenders. For this reason, you should consider working with lenders that have designed lending products specifically for physicians, including physician mortgages, personal loans, and student loan options. Such lenders will look beyond your credit score and evaluate your earnings potential when making underwriting decisions.
As you work to maximize your credit score or repair one that is less than desired, there are a few things that will take you backwards.
Having high or maxed out credit card and loan balances
Closing old loans or loans with available credit
Paying late or not at all
Having an account sent to collections or defaulting on a loan
Filing bankruptcy or having a home foreclosed
Limiting your mix or types of credit
Applying for multiple credit cards or loans, especially over a short period
Request your free credit report(s) at AnnualCreditReport.com
Consider staggering your free reports from each of the bureaus to build in multiple checkpoints throughout the year
Carefully read each of your reports and question/dispute any errors
Identify a target score and a timeframe to achieve it
Identify your gaps – which of the five categories may be affecting you the most
Identify your options – which of the strategies provides you with the most leverage towards a better score
Gather your team – we’d love to help. Consider us here
Make a plan – written and specific is better
Get after it! Patience and persistence at the intersection of high-leverage activities where you have a high degree of influence or control is a solid formula for success!
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