Posted on: July 8, 2017 by Chuck Krugh, CFP
For the most part, physicians earn plenty of money to make their basic expenses. But they’re also famous for overspending! Especially early in their careers, when they feel pressure to ‘keep up with the Joneses, one of the very biggest mistakes young doctors make
Uncontrolled spending isn’t great for your credit score, either, which you will want to preserve so that you get the best possible options for getting a mortgage, a car loan, refinancing educational debt or, eventually, getting a business loan to set up your private practice.
1. Pay all bills on time. This should be elementary, but the Fair, Isaac Corporation – the company that compiles and markets the data that the credit bureaus use to compute credit scores – says that your payment history accounts for a 35 percent weighting in your credit score. That’s the single most important factor. So do what you have to do – set up automatic payments, text reminders, online banking, mark your calendar – anything to ensure that you don’t slip up and miss a payment.
This is especially critical for federally-guaranteed student loan payments, where one missed payment deadline can cost you your eligibility for student loan forgiveness after 10 years – a mistake potentially worth tens of thousands of dollars!
2. Mind your ratios. Add up all your available maximum credit lines. That includes credit cards, bank lines of credit, retail cards, and everything. You want to be using not more than 10 percent of that limit at any one time, to maximize your credit score. 7 percent is better. Anything over 30 percent raises a red flag to lenders and your credit score suffers rapidly after that.
This means be careful about taking on and using low-limit cards. If you don’t have other lines of credit or credit cards to add to your top line limit, even minor purchases on that one card can throw you well above a 10 percent credit utilization ratio.
3. Keep old accounts. The average age of your credit accounts is a significant factor in your credit score, as are the ages of your oldest and newest accounts. So that credit card you’ve had since you were in med school? Keep it open. If you want to close accounts, close a newer one instead (but don’t close so many accounts that you push your credit utilization ratio above 30 percent!)
4. Open new accounts judiciously. Opening or applying for lots of new credit cards in a short period of time is a yellow flag for lenders. New credit accounts for up to 10 percent of your score.
5. Don’t be afraid to shop around for loans. Lenders know that responsible borrowers shop around for the best rates on new loans. For this reason, the bureaus typically treat multiple inquiries for a car loan, or mortgage loan or other similar loan within a short time period as a single inquiry. So don’t be dissuaded from shopping around for a great rate just to preserve your credit score.
6. Add children as authorized users. If you’ve been responsible with credit, you can add your children as authorized users on your account when they’re still teenagers. This gives them a big edge on their peers by the time they graduate from college. And no, you don’t actually have to give them a card. Lenders will report them to the credit bureaus – and building a positive credit history – based on your account, even if they never spend a dime on it. This is how some people in their early 20s have a 750 credit score – they may have accounts that are over a decade old! These are usually authorized user accounts their parents set up for them.
7. Use rewards cards for routine spending. Many credit cards will provide a cash back reward of between 2 and 5 percent. There’s no interest charge if you pay them off in full by the statement due date. Setting your phone bill, utilities, car insurance and other routine expenses you’d make anyway on a good rewards card is a painless way of earning a couple of hundred dollars or more per year. Make sure the vendor doesn’t charge convenience fees for paying with a credit card, and subtract your annual fee from the total anticipated rewards amount. Just make sure you pay them off without fail within the grace period or you’ll lose the cash back rewards you thought you gained!
If you travel a lot, or fly to visit family regularly, you might consider a travel card that’s heavy on mileage and other travel-related perks, and emphasize that rather than a rewards card. If you plan to pay off the card each month without fail, don’t worry much about the interest rate on purchases. You won’t pay it.
8. Check your credit report regularly for errors. Federal law entitles you to a free copy of your credit report each year from each of the three major credit bureaus: Experian, TransUnion and Equifax. Go to annualcreditreport.com. You’ll want to check each of them a couple of months prior to applying for a major loan. It may take that long to get erroneous information removed from your credit history. Meanwhile, checking your report gives you a chance to make good on obligations you may have forgotten about. Lenders know people aren’t perfect, but efforts to pay off old loans look great to future borrowers. Much better than having a default or charge-off on your credit report!
Doctor Disability Insurance, Inc. is an innovative, one-stop service that makes disability insurance shopping quick, affordable, and easy to understand. Physicians save time and money by comparing plans and prices from multiple insurance companies. The site provides free quotes from leading names in the disability insurance industry along with friendly and knowledgeable customer support. The best values in the insurance industry are located in one place and are available any time doctors are ready, including late at night and on weekends.
Based in San Clemente, California, President and CEO Charles Krugh is a Certified Financial Planner with more than 15 years of experience working with people in the medical industry.
Call us toll free at 866-899-7318 to speak to one of our disability insurance professionals.