The tightening economy has put a new focus on personal credit and credit scores. But how credit scores are calculated is poorly understood, even by savvy consumers.
As a physician, you may enjoy a high-paying career, which is attractive to lenders. Still, it’s important to know that your income level is irrelevant to your credit score.
Why Your Score is Important
As explained in this overview from MSNBC finance writer Herb Weisbaum, your credit score “is a three digit number that summarizes the real-time information on your credit report. It ranks you with other consumers according to your risk, on a scale of 300 to 850, where higher scores mean less risk of future defaults.”
All lenders use credit information differently, but consumers with the highest credit scores may get preferred access to the most favorable lending rates. On the other end of the spectrum, consumers with low credit scores can be denied credit or forced to accept higher rates.
Adding it Up
To stay on top of your score and ensure that it remains high, it helps to know what factors go into the calculation. According to SmartMoney.com, these are the five major factors that impact a credit score:
Do you pay your bills on time? This is the single most important factor, which accounts for 35% of your credit score.
How much do you owe relative to your total credit limit? This is also a major factor, representing 30% of your score. A recommended benchmark here is to keep your balances from surpassing 30% of your total credit line.
How long have you been borrowing? A longer credit history is preferred. As a result, older borrowers generally score higher in this category, which represents 15% of your total credit score.
Is your credit still expanding? Said another way, are you applying for credit with alarming frequency? Lenders are wary of borrowers who apply for too much credit in a short time frame. (10% of your score)
Do you have credit diversity? In addition to credit cards, do you have a mortgage, a car loan, etc? Successfully managing different types of credit is a positive in the eyes of credit rating agencies. (10% of your score)
To fully understand your credit score, you need to know what your current score is (it changes). You can access this information online at several popular websites, the best known of which is www.freecreditreport.com