As busy dental students, our credit score is the last thing we want to think about, but it is never too early to start building your credit. Building my credit score and maximizing credit card spending rewards are two of my hobbies. In my downtime, I like to check my credit scores and online bank statements, as well as read financial articles. Having a bad credit, as well as if you have no guarantor could greatly effect if you could mortgage a house as well as many other purchases.
Earlier this year, the method in calculating credit scores was changed. The new scoring system is being implemented by a company called VantageScore, which was created by credit bureaus Equifax, Experian and TransUnion. These changes could affect your credit score overall, whether you have good or bad credit. But how is your score calculated in the first place? Here are some factors that impact your credit score.
Credit card utilization
This ratio is based on your monthly spending divided by the credit limit. Typically, you want this ratio to be as low as possible, ideally under 10 percent (e.g., with a $10,000 credit limit, spend $1,000 or less).
- American Express offers a charge card that has no utilization ratio because the debt must be paid in full each month.
- Making a payment before the statement closes reduces the utilization ratio because there is less debt reported.
This is like a GPA — once you get an F, it is hard to bounce back. Always make your payments on time or at least make the minimum payment if you cannot pay in full.
- Autopay can help prevent missing a payment. You can also adjust the amount to pay in full or partially.
Banks can terminate their relationship with you, resulting in a drop in your credit score. If this has happened to you, negotiation with the bank can help you get back on track.
Age of credit history
A rule of thumb is to never cancel a no-annual-fee credit card because it helps increase the average account age.
- If you have an annual-fee credit card but do not use it often, a product change is an option. By calling the bank, you can convert the card to a low tier non-annual-fee card. Doing so will maintain your credit line history.
This includes all of your credit cards, mortgages, personal and student loans. Surprisingly, the higher the better because it shows that you are responsible.
There are two different types of credit inquiries: hard and soft. Hard inquiries occur when you apply for a credit card, loan or mortgage. In general, they occur in situations where you will accumulate debt. Soft inquiries occur when you perform a credit check. An example would be an employer checking your credit history. Unlike hard inquiries, soft inquiries do not negatively impact your credit score. Hard inquiries will remain on your credit report for two years.
Monitoring your credit score
Many banks such as Chase, American Express, Discover and Bank of America offer free monthly credit score monitoring. When checking your credit history, look for unrecognized credit inquiries. If something does not match up, call the credit bureau to manually remove it.
In order to achieve a high credit score, you would need to target all of these areas. It takes time; however, the earlier you start, the better the advantage you will have in the future. After graduation, you might need to refinance student loans, request a loan to build your practice or buy a house. All require you to have an excellent credit history. A higher credit score can help you secure a lower loan interest rate, which will help you save money over time.
~Kai Huang, Alabama ’20