Medical or dental students, residents, and early-career physicians or dentists may need access to significant amounts of credit—whether to pay for school, moving to school or college costs, setting up a clinic, or joining an existing clinic. If you understand the factors that affect your credit score, you will be better able to get the credit you need at a reasonable price.
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What is a credit score?
When you borrow money for a car loan, credit card, student loan, student line of credit, or mortgage, the lender reports your account information to a credit reporting agency.
From this information, the credit bureaus determine your credit score. The financial institution will then use your credit report and credit score to determine how much you have borrowed over time and how well you have paid back your debts.
Your rating is not a fixed number. It changes based on your loans and repayments. Additionally, lenders have their own rules when it comes to interpreting your credit score.
Myth 1: The higher your income, the higher your credit score.
You can earn high income as a doctor or dentist. However, your credit score is not based on your income. It only reflects your activity as a borrower.
Although lenders often consider a person’s income to determine how much they can borrow, salary and related information are not part of the data used to determine their credit score.
Therefore, you should not think that your score will be high if you have a high income, or that it will be lower if you have a low income.
Myth 2: If you don’t use available credit, your credit score will improve.
While you may think that not using the credit you have available to you would improve your credit score, in reality, lenders want to see that you can borrow and then pay back.
Accessing and using credit over time will improve your credit score by showing lenders that they can expect you to repay the money you borrow.
Myth 3: You can improve your credit score by closing unused credit.
Rather than improving your credit score, closing unused credit can actually lower it.
Here’s why: Your credit score is based in part on your “credit utilization,” which is how much of your available credit you’re using.
For example, let’s say you have two credit cards, each with a limit of $10,000. You have a $10,000 balance on one card but none on the other. So your credit utilization rate is 50% ($10,000 of $20,000).
Let’s say you’ve heard that canceling credit you’re not using could boost your credit score, so you decide to cancel a card you don’t have a balance on. Your credit utilization rate will then increase to 100% because you will use all the credit you have available.
In the eyes of the credit agencies, this high credit utilization rate may mean that you are having trouble managing the credit and the required repayments – despite the above-average income you earn or could earn as a doctor or dentist. Therefore, your high credit utilization rate lowers your rating.
Myth 4: If your credit score is bad, it will improve immediately if you pay off certain debts.
While it makes sense to you that paying off your debt would result in an immediate improvement to your credit score, you will need to be more patient.
Paying off your loan or credit card balance in full will not affect your credit report or score until the lender reports the payment to the credit bureaus.
Although lenders typically report payments to the credit bureaus monthly, it may take a billing cycle or two for your payment to be reported. But when it does, the credit bureaus take that information into account and adjust your score upward.
Myth 5: Your credit score is always accurate and you can’t change it.
Your credit score is based on information provided to credit reporting agencies, and some of this information may be inaccurate.
For example, errors can be in your personal information (date of birth or postal address) or in your credit history (payment made on time but entered late by mistake). It’s also possible that your credit report shows accounts that you never opened, which could be a clue that someone is trying to steal your identity to gain access to your credit.
If you believe your credit report contains incorrect information, you can dispute its accuracy with the credit reporting agencies (Equifax and TransUnion). You can also ask your lenders to verify and confirm the information they have provided to these agencies.
A good way to make sure your credit report is free of errors is to check it from time to time. You can get a free copy of your credit report from credit reporting agencies in Canada.
If you have questions about how credit and loans can fit into your overall financial plan, contact a Specialist, RBC Healthcare Professional Services.
Related article: The six best ways to save for medical students
This article is intended to provide general information only and is not intended to provide legal, financial or other professional advice. Please consult with a professional advisor regarding your specific situation. The information presented is believed to be factual and current, but we do not guarantee its accuracy and cannot be considered an exhaustive analysis of the topics discussed. Opinions expressed reflect the judgment of the authors as of the date of publication and are subject to change. Royal Bank of Canada and its entities do not promote, either explicitly or implicitly, the advice, opinions, information, products or services of third parties.