While doctors are generally attractive candidates for lenders, their credit scores still matter when making decisions about lending and whether they’re eligible for personal loans, mortgages, lines of credit, and credit cards. Not only will it influence whether you are eligible, but also what rate you will qualify for, so it’s always in your best interest to have a more competitive credit score. While you may know the basics of what a “really bad” and “really good” credit score are, it can be confusing to determine how your credit score is calculated, what it means for your future, and what to do if your credit score gets dinged. Members in our physician communities often have questions about how to improve their credit score, how much it will impact their financial future, and what might be affecting it, so we’ll cover these topics and more below.
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Credit Score: What Is It?
Credit scores are essentially financial report cards. They are a three-digit number which lenders use to estimate how likely you are to repay new debt. The most widely used credit scores are the FICO score and the VantageScore. Both range from 300 to 850, but weigh contributing information gathered from the credit bureaus (such as Equifax, Experian and TransUnion) differently. Scores are based on five main factors: payment history, credit utilization, credit history length, how recently you have applied for credit elsewhere and new credit, and overall credit mix. Note that most lenders take credit scores into consideration alongside other factors such as your income, net worth, and other debt.
Credit Score Ranges and What They Mean
720 or more: Excellent credit
690 to 719: Good credit
630 to 689: Fair credit
629 or below: Bad credit
Factors That Impact Your Credit Score
Payment History
Payment history is one of the biggest factors to your credit score, weighing in at approximately 20-30% of your total score. Payment history is a monitoring of how often you’re paying your bills on time. If you miss a payment by a day or two, your score will likely be minimally affected. However, missed payments can affect your score differently based on how much was owed, how recently you missed the deadline, and how often you’ve made late payments in the past. If you’re so late on a payment it goes to collections, this will impact your score more negatively. Remember, you won’t always be notified when a payment is sent to collections, so do your best to pay bills on time regardless. A payment that is significantly late can stay on your credit report for years.
Credit Utilization
Credit utilization is the second greatest factor after payment history when calculating your credit score and also carries 20-30% of weight in your final score. Credit utilization identifies how much of your available credit is in use/how much you currently owe. The less credit you’re using, the better. Remember, this considers utilization across all credit cards you own. A general rule of thumb is to use no more than 30% of your available credit at once, but using as little as possible is best.
Credit History Length
This factor holds less weight than the first two and is simply the duration of your oldest credit account, newest credit account, and average of all accounts combined. It lets lenders know how long you’ve been responsibly (or irresponsibly) managing your credit. Typically, the longer your credit history is, the higher your score. Remember this if you’re thinking about closing an old credit card account. You may want to think twice about cancelling it unless it has significant annual fees.
New Credit and Recent Credit Inquiries
New credit accounts for how frequently you’re opening and applying to new lines of credit. If you apply for new credit cards fairly often, it can negatively impact your score and send a signal to lenders that you might be financially unstable or too reliant on credit. In addition, every time you apply for a new credit card or line of credit, you trigger a hard inquiry (lender pulls your credit report) which often lowers your score. When you open a new card, your length of credit history also starts from zero. However, opening a new line of credit also increases the amount of credit you have available leading to a lower credit utilization.
Overall Credit Mix
Overall credit mix is the diversity in the types of credit you have. It includes any credit accounts or loans in your financial history (credit cards, student loans, auto loans, mortgage, etc). The variety in your credit mix can help your score by showing lenders you have experience and success with different types of borrowing. Think twice before opening a new line of credit just for credit mix sake, chances are it could hurt more than help.
Checking or Monitoring Your Credit Score
The foundation of improving your credit score and overall financial health is to make sure you are regularly monitoring it.
You can check your credit score by running a credit report, which displays a record of your credit history that covers what debts you currently have (credit cards, mortgage, etc), how long you’ve had the credit, and if you’ve paid it regularly and on time. There are many different ways to get access to this information including from your bank or credit card issuer, as well as several commercial companies in the space. You can request a free copy of your credit report from any of the three major credit bureaus (Equifax, Experian, and TransUnion). When you access your own credit report, it does not ding your credit the way that it does when others access it.
Monitoring your score will aid you in understanding what impacts your score and allow you to quickly detect any fraudulent activities that could negatively impact your score.
Common Reasons Why Credit Scores Drop Unexpectedly
If you see an unexpected drop in your credit score, the following are common reasons why this may happen:
High balance on your credit cards - fortunately, this is easily reversed by paying off the balance.
Closed a credit card - Try not to do this unless there are annual fees that don’t make sense, as it will lower the average age of your existing accounts, as well as lower the overall credit available to you, thus making your percent of credit utilization higher
Paid off a loan - while this may be a good thing, your credit score may take a small ding for similar reasons to closing a credit card, as well as changing your credit mix
You had a late payment reported - as these can lead to significant drops without prior notification of intention to report, it is best practice to have payment reminders or have automatic payments scheduled
You applied for a new line of credit or credit card
You experienced identity theft - unfortunately, this is becoming more and more common, which is why monitoring your credit and freezing your credit is so important. If someone opens a line of credit under your name and doesn’t pay the bills, it can really damage your credit history.
Beginner Tips for Improving Your Credit Score
If you’re starting to sweat over your credit score: take a deep breath. While improving your credit score is a long game, there are many things you can start doing today to help raise your score or combat dings to your credit.
You can improve your score by implementing responsible financial practices, and being aware of how credit scores are calculated so that you can plan accordingly. Best practices include:
Paying your bills on time
Keeping your credit utilization under 30% of your total credit at most - lower is better
Don’t submit too many credit inquiries in a short period of time; when making inquiries, only let someone submit a ‘hard pull’ on your credit if you intend on going forward with the application (soft pulls are better)
Not opening or closing lines of credit regularly - remember, the longer lines of credit are open, the higher your average credit history length
Have a mix of credit cards and other types of lines of credits such as mortgage or student loans
Keep your credit frozen
As an aside, although having your credit frozen will not prevent people from trying to pull your credit, it’s still a good idea to avoid fraudulent activity that could indirectly affect your credit score. It only takes a few minutes to do and is generally recommended for physicians to do.
Learn more about freezing your credit to protect against identity theft.
Conclusion
Physicians need lending and access to credit at many different points in their lives, whether for credit cards or when applying for loans such as mortgages, funds to start a private practice, personal loans, or otherwise. Keeping your credit score healthy will ensure both access to credit as well as competitive rates, and monitoring your credit score regularly is a good practice to get in the habit of as part of your routine financial checkup.
Additional Resources for Physicians
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