Credit scores are a topic of discussion this time of year. Fourth year medical students will be looking to make some financial decisions that include home buying or securing an apartment as they move on to residency training in a large city or metropolitan area where approval is dependent on a clean credit report.
If your credit score is low or nonexistent, you will likely pay more when extended a line of credit. Fortunately, by understanding how credit scores work, you can boost your number.
What You’ll Learn
- How credit scores affect interest rates.
- Consequences of low or nonexistent credit scores.
- Ways to improve your credit score.
If you have not checked your credit score, it is probably time to do so. Knowing your credit score (and knowing if it needs to go up) is essential to take control of your finances and position for financial success. You can get a good read on your credit score using free apps like Credit Karma or My Wallet Hub. These apps also help you understand how you can improve your score.
This is especially true for medical students who will be young professionals, who do not have extensive credit histories and could be unaware of a low score that might hold them back financially. In fact, you could be one of 26 million Americans who are deemed “credit invisible” (meaning they have no credit history), mostly those under the age of 25.
Lenders use credit scores to determine your attractiveness as a loan candidate. Fortunately, not used in securing student loans like the Grad PLUS Loan. However, used in securing commercial debt, such as a car, a house, a credit card. Having a lower score can still raise your interest rates—and cost you more money over time.
Credit Cards and Interest Rates
Having a low credit score does not prevent you from securing a loan or getting a new credit card, but it can have repercussions. If your credit score is low, you need to pay particular attention to the interest rate, also known as the annual percentage rate (or “APR”), when you apply for a new line of credit. The lender definitely is watching!
When you apply for a credit card—whether that is while you are in medical school or after—the credit card company looks at your credit score to judge how dependable you are paying back your debts. If your score is high, the credit card company may offer a lower APR. Someone with a lower credit score, by contrast, may end up with a higher APR. If you do not pay your balance in full each month, a person with a low score will also have to pay higher interest rates. If you have defaulted on the terms of your agreement or make late payments, you can also pay higher interest rates.
The same holds true for larger loans, like mortgages or car loans. Someone with a very high credit score (720 or higher) may receive a lower interest rate. However, installment loans (like mortgages) tend to be much larger than revolving loans (like credit cards), which means the amount of interest that builds up on them over the years can be substantial—so you’ll want your interest rate to be as low as possible. Otherwise, the cost of borrowing could hit your bank account hard.
Have you heard someone shrug off a low or nonexistent credit score by saying they do not plan on borrowing money any time soon? They may not know that bad credit can hurt you in other ways. For instance, in many states, car insurance costs more for people with poor credit. Property owners can check credit before renting an apartment, too.
Additionally, before offering you a job or promotion, an employer may check your credit – especially if you will deal with cash or valuables. The thought is that people with large debts or other credit problems may be more likely to steal or commit fraud. Some employers are convinced that people who manage their credit well are better workers than those who do not.
Employers who check credit histories typically look for serious negatives, such as collection actions, repossessions, foreclosures, and evictions. By proactively explaining that the problem has been resolved, was the result of something beyond your control, or simply fixed by employment, you could bolster your chances of landing the job.
Improving a Low Credit Score
If you currently have a low credit score, you can take steps to improve it. The first one: learning what goes into your score, as well as why your score is low. Once you do this, you will know the issues you will need to address, though some will be easier to fix than others.
For instance, you may have a tough time hiking up your score if you have a default or bankruptcy in your credit history (tough, but not impossible!). However, if you are simply using up too much of your available credit, charging less or asking your credit card company to increase your limit could give you a boost.
Here are some other potential ways to improve a low score:
- Review your credit report, and report any inaccuracies. Keep in mind that some fixes could actually result in a negative result, hopefully temporarily.
- Pay your bills on time and in full.
- Reduce the amount of debt you owe.
- Avoid opening several new accounts at once
- Keep in mind that sometimes closing an account could reduce your score temporarily.
In addition, if you are among the “credit invisibles” with no score, know that you can build credit if you are against taking on debt. You could apply for a secured credit card with your banking institution; in addition, some credit bureaus will put rent payments in your credit history. No matter how you do it, remember this: lenders cannot see you in a good light if they cannot see you to begin with.