borrow and the interest rate you will be charged. While lenders consider a number of factors when making a credit decision, the most critical aspects of your financial profile are your personal debt — including student loans, credit cards and lines of credit — and your overall credit score rating.
Good credit is the key to both your professional and personal financial investments, and your credit score signifies to lenders your overall creditworthiness.
Factors Used in Calculating Credit Scores
Your credit score is a numeric expression of the information contained in credit reports generated by three major credit bureaus — Equifax, Experian, and TransUnion. These credit reports summarize your credit history including the types and amount of debt you have held in the past and your timeliness in making payments. Certain credit events can have a highly negative impact on your credit reports, including charge-offs, debt collections, bankruptcy, foreclosure, tax liens, and judgments.
The credit score itself is assigned by an independent rating company, with the most widely used scoring systems provided by FICO (Fair Isaac Corporation) and VantageScore 3.0. Credit score rating is not a precise art, as each rating company develops its own score range and lenders have their own definitions of what comprises a good or poor credit score. FICO and VantageScore 3.0 each use a score range from 300 to 850, with higher numbers indicating the borrower is a more favorable credit risk, and lower numbers indicating the borrower is a less favorable credit risk.
Credit scores from FICO for the general population are typically comprised of the following mix of personal information:
FIGURE 2.1: HOW CREDIT SCORES ARE CALCULATED
Source: www.myfico.com/crediteducation/whatsinyourscore.aspx
Five Actions That Can Ruin Your Credit Score
While occasionally being a day late on a bill payment may not ruin your credit score, there are five specific credit actions that can definitely lower your credit rating. In some cases, dramatically. Do everything in your power to avoid these credit situations:
Maximized credit card. A credit card that is “maxed out” — charged up to, or close to, the limit of the credit line assigned to the card — indicates to lenders that you are not in control of your debt.
30-day late payment. While a payment that is a day or two late may be overlooked, a 30-day late payment is a red flag to lenders indicating you may be having difficulty repaying your loans.
Debt settlement. Settling debt with a creditor is better than simply not repaying the loan, but still has a negative impact on your credit score.
Foreclosure. Foreclosure on a personal or business mortgage will have a significant negative impact on your credit score.
Bankruptcy. Bankruptcy is the worst case scenario and will significantly downgrade your credit rating for many years.
Clearly, mismanagement of your debt can result in a poor credit score and, consequently, result in serious damage to your overall financial profile. Based on the formula for granting loans, credit mismanagement is likely to lower the amount of credit available to you and require a higher interest rate on loan payments. This can significantly impact the amount you pay over the life of your loan, as shown in figure 2.2.
Ultimately, a poor financial profile can impact your ability to build a solid foundation for dental practice success, including:
Less money to design your practice according to your vision
Restrained ability to develop a competitive operation
Fewer funds for growth in salaries, marketing and overhead
Less profit due to higher loan expenses
Potentially a decreased opportunity for full practice success
The good news is that you have control over building and maintaining your financial profile.
FIGURE 2.2: HOW CREDIT AFFECTS INTEREST RATE*
Ten Simple Steps Towards a Healthy Financial Profile
Following are 10 simple steps you can take to improve your credit rating and ensure a healthy financial profile:
1 Maintain at least two or three revolving credit accounts such as credit cards and lines of credit. This shows you are creditworthy and able to manage debt.
2 Avoid applying for credit from too many lenders. Multiple credit inquiries within a short period of time negatively impact your credit rating.
3 Demonstrate that you know how to use your credit wisely by not using all the credit available to you.
4 Make on-time monthly payments on credit cards, mortgages, installment loans and student loans. Remember, many service providers do report late payments and collections to credit bureaus.
5 Consolidate your personal loans in order to improve cash flow and generate a better financial profile.
6 If you are in dispute with a creditor, continue to make minimum monthly payments while working towards a resolution.
7 Notify creditors in writing of your address change.
8 Avoid co-signing or guarantying a loan for a friend or family member, as it has the same impact on your credit as being the primary borrower.
9 Protect your identity. Review your personal credit report at least twice a year to ensure accurate reporting of all accounts. Inform all credit bureaus in writing of any discrepancies.
10 Keep copies of all agreements, documents clearing judgments or liens, and letters from creditors clearing discrepancies in your loan history. Note that all credit information stays on your records for up to 10 years.
Begin improving your financial profile at least 12 months before starting your practice design project. With a strong financial profile, you have far greater leverage for obtaining affordable financing at the best possible rates.
Investigate the Financial Implications of Your Project
When planning a practice upgrade, many doctors find themselves weighing the pros and cons of remodeling or expanding their existing facility versus building a new office from the ground up. There are both practical and business reasons why either option might be desirable, but what are the financial considerations when trying to make this decision?
Advantages of Remodeling an Existing Practice
It should be no surprise that remodeling a current facility will likely be less costly than building from the ground up, as you are working with an existing structure. If your current space allows room to grow, you can direct a larger percentage of your funds to the décor as you are not paying to develop completely new walls, flooring, electrical services and plumbing.
In addition, with a more modest budget required for a remodel versus building from the ground up, you may find it easier to obtain project financing that fully meets your needs, particularly if you are starting a new practice and have not yet established the cash flow history upon which project funding may be based. While a remodel may not allow you to incorporate all of the features of your dream practice, you should still have adequate funding for modifying the floor plan to improve traffic flow, incorporating current equipment, expanding functional areas and enhancing office décor.
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