Published October 4, 2021 • 5 Min Read
No matter you are medical/dental students, residents, or early-career physicians/dentists, you may need to access significant amounts of credit, whether to cover the costs of school moving for residency, for establishing a new practice or getting settled in an existing one. Understanding the factors that can impact your credit score can help you ensure that you can access the credit you need at reasonable rates.
What is a credit score?
When you borrow money, such as for a car loan, a credit card, a student loan or line of credit, or a mortgage, the details of your account are reported by the lender to a credit reporting agency in Canada.
Credit reporting agencies use that information to set your credit score, and financial institutions use your credit report and score to see how much you’ve borrowed over time and to find out about how you’ve repaid your debts.
Your score isn’t a fixed number, but changes based on your borrowing and repayment activity. Lenders also set their own rules for how they interpret your credit score.
Myth #1: The higher your income, the higher your credit score
Even though you might earn a high income as a physician or dentist, your score isn’t based on your income. Instead, it only considers your borrowing activity.
While lenders will often use your income to determine how much you can borrow, your credit score doesn’t include salary or income information.
This means that having a higher income doesn’t mean you’ll have a higher score, and having a lower income doesn’t decrease your score, either.
Myth #2: If you don’t use your available credit, your credit score will improve
While it might seem like avoiding using your available credit would boost your credit score, the reality is that lenders want to see that you can both borrow and repay funds.
Having credit in place and using it over time, will increase your score as it shows lenders that you have a high likelihood of repaying the funds you borrow.
Myth #3: You can boost your score if you cancel unused credit
Instead of boosting your credit, cancelling unused credit may actually decrease your credit score.
Here’s how: Your credit score is based in part on your “credit utilization,” which measures how much of your available credit you’re using.
For example, imagine you have two credit cards with limits of $10,000 each. You have $10,000 on one card, and no balance on the other. In this case, your credit utilization ratio is 50%, or $10,000 divided by $20,000.
Say you heard that cancelling unused credit can increase your credit score, so you decide to cancel the card with no balance. Now your credit utilization is 100%– you are using all of your available credit.
This high credit utilization ratio could signal to the credit reporting agencies that you’re struggling to manage your credit and required repayments — even if you have above-average earnings or significant earning potential as a physician — thereby reducing your score.
Myth #4: Paying off overdue debt will immediately raise a bad credit score
Although it might feel like paying off debt should instantly improve your credit score, the truth is it takes time.
Even if you pay down a loan or credit card balance to zero, that payment won’t be reflected on your credit report and score until your lender reports the payment to the credit reporting agencies.
While lenders typically report payments to credit reporting agencies monthly, it can take one or two billing cycles for your payment to get reported. But once the payment is reported, it will be taken into account by the reporting agencies to improve your score.
Myth #5: Your credit score is always accurate and you can’t change it
Your credit score is based on information provided to the credit reporting agencies, and it’s possible for some of that information to be incorrect.
For example, there could be mistakes in your personal information, such as your birthdate or mailing address, or in your credit history, such as an on-time payment that’s shown as late. Your credit report could also include accounts that you’ve never opened, which could be a sign that someone is trying to steal your identity to access your credit.
If you think there’s incorrect information on your credit report, you can dispute it with the credit reporting agencies (Equifax and TransUnion). You can also ask your creditors to check and confirm the information they’ve provided to the reporting agencies.
Reviewing your credit report from time to time is a way to help check whether it has any errors. You can get a free copy of your credit report from Canada’s credit reporting agencies.
If you have questions about how credit and borrowing fit into your overall financial plan, a dedicated RBC Healthcare Specialist can help.
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This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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