Using Credit to Build Financial Stability

As I continue to have conversations with young and seasoned veterinarians, I realize that although most veterinarians know their credit score many have no idea what is behind the number.   I would equate this to me looking at my dogs blood work and trying to assess their health; I  can evaluate if a number is in a normal range but don’t have the ability to take action to impact that value.  Therefore here is your opportunity to learn how you can assess your score and take actions to change it positively or negatively.

Assessing the Score 

The Scorecard:

• 780+:  This reflects excellent credit health and current actions should be continued
• 720 to 780:  This reflects an overall healthy credit client and with a few minor tweaks to credit management you can be in excellent health.
• 680 to 720: You are in a normal range and equal to most of your peers, no cause for concern but there is opportunity for improvements.
• 650 to 680:  There is no immediate risks but if you don’t take action or change your credit habits it could result in a negative financial impact on your life.
• Below 650:  You should be preparing an immediate action plan to improve your credit health, based upon the information below.

Installment Accounts

These are generally accounts that have a positive impact on your credit score, they include a mortgage payment, a car payment, your student loans or other types of loan of this nature.  In this nature means that a maximum loan amount is made at the time of the note and a payment is made on a regular basis until that amount is paid off, and additional credit is not extended through that credit facility.  If you manage these accounts and payments at a reasonable level of your income this will build a strong credit score.

Revolving Accounts 

A revolving account is an account where you are approved for a line of credit that is up to a certain dollar amount that you are able to draw upon as you need to access the available limit.   The most common example of this type of credit is a credit card, it can also include a home equity loan or a personal line of credit as examples.  You do not need to avoid this type of credit but you will want to use it judiciously and ensure outside of a home equity loan you are paying the balance off every month.  It is important to not use this type of credit to finance long term purchases if you would like to achieve the healthiest overall credit profile.

Credit Utilization 

The amount of credit use utilize will impact your overall credit score to a much greater extent than you may be aware.  An example of this is if you monthly living expenses of $2,500 that you charge to your credit card to collect points and pay it off on a monthly basis and your maximum available credit is only $3,500; the credit reporting agencies may never know your balance is paid off and based upon your utilization my assess your credit risk to be lower.  You should therefore try to maintain your monthly usage of credit at no more 50% but ideally less of your available revolving credit on any single credit card.

Total Debt/Monthly Debt Payment 

You will also want to be aware of your debt to income ratio, this is a calculation where you will determine the total annual debt payments for any type of obligation divided by your total income.  The lower the percentage the lower the risk, as a point of reference most home loans require your total debt to income ratio to not exceed 40%; where an auto loan might accept risk up to a 50% debt to income ratio.  You will want to keep this as low as possible within reason as most younger veterinarians will be near the 40% debt to income ratio mark and more tenured veterinarians can see this be below 25%.

Derogatory Marks 

These are marks such as a prior bankruptcy, foreclosure, judgement, slow payments (paying after the due date) or lien that has been filed by you or against you for an unfulfilled debt obligation.  If you are in a situation that you have one of these events the closer in proximity from a time perspective the more it will reduce your credit score.  The more of these type of occurrences you have on multiple accounts the lower it will drive your score.

If you are in a position where one or several of these events have occurred I would encourage you to use the guidance above to start to rebuild your credit to

Overall Report 

Your credit report is a standardized financial resume to the world, in certain cases like when applying for a call loan this resume will be the single piece of data used to make the loan decision.  On the contrary if you are applying for a loan to acquire a veterinary hospital this will be one piece of information, which will include personal interviews and your credit report may not define you in these situations.  Regardless of whether this report is a small piece of the financial review or the single data point, this is something you can control and build a positive position for yourself.  Use this information to ensure that you are building the best resume possible.