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Why Doctors Tend to Have High Credit Scores

(Hey everyone.  The following is a guest post from my friend Ryan, who specializes in financial planning for physicians.  He’s doing great work since many physicians and other health professionals are clueless when it comes to their finances.  In this post Ryan talks about a unique aspect of doctor’s credit scores.  Enjoy!)

As a financial planner who specializes in working with doctors and their families, I’ve realized over time that many doctors do have high credit scores. Having a high credit score enables doctors to get competitive interest rates on mortgages, car loans, and more. It also shows lenders that they’re not only accomplished physicians but responsible borrowers who pay their bills on time.

I’ll expand more why doctors typically have high credit scores by outlining how a credit score is actually calculated. That way, if you’re a doctor who wants to raise your credit score in anticipation of a big purchase, you’ll know the steps to take to increase your score to get the best opportunities available to you.

Here are some of the reasons why physicians typically have high credit scores:

1.  Length of Credit History

The length of your credit history definitely factors into your score. For many doctors, taking out student loans is the first step in establishing a credit history. If you start taking out loans as an undergraduate, you’ll have at least 7-8 years of credit history by the time you finish residency.

If you didn’t take out student loans as an undergraduate but you did as a graduate student or medical school student, you’ll still have a few years of credit history under your belt. This helps to improve your score.

2.  Payment History

Your payment history is probably the most important aspect of your credit score because it makes up a whopping 35% of your score. This is the part of your score that shows lenders you’re a worthy investment and that you’ll pay them back on time.

The great news is that once you take out student loans, you’ve started a credit file. Even if your student loans aren’t due yet, your account is in good standing month after month while you’re in school. Lenders love to see this.

If you have credit cards in addition to your student loans, be sure to pay these on time as well. Even if your student loan accounts are in good standing, missing a credit card payment will be detrimental to your score. So, make those payments on time every time solely because your payment history factors so heavily into your overall credit score.

3.  Debt Utilization

 Having a low debt utilization percentage is a fancy way of saying that you’re living within your means. Your debt utilization percentage is how much debt you have relative to the amount of credit available to you. So, if you have 5 maxed out credit cards, your debt utilization percentage will definitely hurt your credit score. However, the more available “space” you have on your revolving credit, like credit cards, the better your credit score will be.

The great news is that student loans are considered installment debt, not revolving debt. They’re a different type of debt than credit cards and thus aren’t factored into this debt utilization score. So, if you have hundreds of thousands of dollars in student loans but you’re not carrying a balance on your credit cards, your debt utilization percentage will be low, which is good for your credit score.

Now that I’ve listed the three parts of a credit score where doctors typically excel, I want to take the time to write about what can hurt your credit score too.

After all, the goal in life is generally to become financially well off, self-sufficient, and happy. Having a strong credit score can enable you to get lower interest rates on some of your biggest purchases, saving your thousands and thousands of dollars over the course of your life. This, in turn, will allow you to use your hard earned money for the things you actually want to do.

So, be aware of these two parts of a credit score as well:

1.  Credit Mix

 Lenders actually want you have a few different types of loans, called a credit mix, because it shows them that you’re able to successfully handle various types of payments like a house payment, credit card payment, and a car payment.

If you only have student loans, this could lower your score, but if you mixed it up a bit (see what I did there?) you could raise your credit score by a few points.

For older doctors who own houses, cars, and have business loans, it’s easy to have a decent credit mix. However, newer doctors who are just finished training might not have many different types of loans.

Keep in mind that credit mix is a small portion of your score and you shouldn’t go and take out loans that you don’t need for the sole purpose of improving this part of your score. However, if you need to bump up your score a few points to qualify for a better mortgage interest rate, diversifying the types of loans you have is something you can try.

2.  New Accounts

This might seem a little counter-intuitive to the point mentioned previously, but it’s something worth mentioning. Basically, lenders don’t like it when you open a bunch of new accounts at once. It signals to them that you’re in need of a lot of credit quickly or that you’re somehow in need of financial help.

So, avoid opening several different credit cards in one year. At the same time, avoid closing your old accounts. Lenders might not like to see a lot of new accounts but they love seeing old accounts in good standing. It shows that for many years you’ve been good about having loans and paying them back on time.

Keep in mind that as you go through your daily life, your credit score will fluctuate. It’ll fluctuate as you pay down debt. It’ll change if you refinance your student loans. It will also change if you get a new travel credit card or a new house. It’s okay for your score to go up and down some, as long as you’re consistently making your payments and checking your credit report regularly to ensure your identity is safe. I tell my clients to sign up for an account at Credit Karma because it’s free, you can check your score whenever you want, and you can dispute anything that’s not right your credit report easily and most importantly, quickly. After all, you don’t have a lot of free time to worry about your finances, right?

So, the good news for all the doctors reading this is that you probably have a high credit score already due to the points I mentioned above. However, if you don’t or if you’re looking to boost your score a few points, that’s absolutely possible by understanding how your credit score is calculated and knowing how you can improve it over time.

Ryan Inman is a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a physician, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients. To schedule a free 30 minute consultation, feel free to contact Ryan at any time.

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My Favorite Student Loan Calculator

This is going to be a short post, but it should help a lot of people.

Since I’m a finance nerd and think about debt payoff and investing a lot, financial calculators take up a lot of my time.  While there are a lot of good investing calculators out there, I could never find a nice debt payoff calculator.  Here’s what I look for in a good debt calculator:

-The ability to enter multiple loans with different interest rates.  This is really helpful for people with student loans.  Sadly, most calculators don’t even have this seemingly basic feature.

-A graphic representation of my current loans and when they will be paid off.

-The ability to see the effect of increasing or decreasing your extra loan payment on your loan payoff date.

Ready For Zero had a program that did exactly this, and it was great!  I used it for a few years until they suddenly stopped offering it this year.  Huge bummer.

I searched futilely for a similar calculator with no luck.  Recently, I tried to search for a calculator again and an old friend resurfaced…

Unbury.me

I wrote about unbury.me a few years back because the calculator had everything I wanted.  It even showed how much more time and money you’d save by using a debt avalanche instead of a snowball!  It was a very no frills and basic looking calculator but it got the job done.

Like Ready For Zero, it mysteriously disappeared.  But now it’s back with a nice updated look.  Here is a look at the home page:

Everything I want is right there on the home page looking all simple and clean.  From here you can add as many loans as you want and enter the balance, interest rate and monthly payment.  And you can select if you want to pay them off using the avalanche (highest interest loan first) or snowball (lowest balance loan first) method.

Once you enter your information, you’ll be redirected to a cool dashboard with a lot of nice colorful looking graphs.  It’s a nice little control center that gives you a ton of good information.

But the best part is the top of the dashboard which looks like this:

All the information I need in a nice little toolbar.  I love being able to see the exact month my loans will be gone (less than 2 years!)

There are a lot of other cool graphs and numbers to play with.  Number junkies like myself will spend a lot of time on this site.

Having a good student loan calculator like this can be a very motivating factor in paying off your loans quickly.  It’s great seeing the exact month you will be debt free and the powerful effect of paying more on your highest interest loan.

I recommend setting aside a nice half hour to enter all of your student loans and looking at all the nice graphs they have on here.  Another feature is that you can create a profile and save all of your info.  Saves having to re-enter all of your loans again.  Unbury.me is simply an awesome student loan calculator.  Enjoy!

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