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Title set in Georgia 50pt
Building & Managing
Your Financial Profile
Kathy Ells
Wells Fargo Practice Finance
ASDA Regional Meeting
Buffalo, NY
September 24, 2011
Today’s topics
 The importance of maintaining excellent personal
credit
 How your credit score is calculated
 Actions that can ruin your credit score
 Steps to building a healthy financial profile
Maintaining excellent
personal credit
Ask yourself:
Is my credit strong enough to allow me to
start or purchase my own practice?
What does my credit history tell a lender?
About credit
 Credit allows you to borrow tomorrow’s money to
pay for something today
 Credit is a privilege – not a right
Importance of healthy credit
 Good credit = the basis of all your financial
investments
 Buying / building a practice
 Buying / building a home
 Vehicle purchases
 Personal lifestyle choices
 Boats, second homes, RVs
Importance of healthy credit
 Lenders use credit reports to determine:
 Who qualifies for a loan
 At what interest rate
 At what credit limits
Importance of healthy credit
 Other companies use credit reports to judge level of
individual risk / responsibility:
 Mobile phone companies
 Insurance companies
 Employers
 Landlords
Importance of healthy credit
 Credit reports
 List of debts
 Payment history
 Public record information
 Inquiries about your credit worthiness
Credit impact on
business loans
Credit impact on business loans
 Most critical to your lender:
 Personal debt
 Student loans
 Credit cards
 Lines of credit
 Overall credit rating based on:
 Amount of total debt
 Timeliness of monthly payments
Credit impact on business loans
 Practice acquisition loan credit decision based on
 Practice cash flow
 Your ability to repay the loan while covering expenses &
lifestyle
 Practice start-up loan credit decision based on
 Your debt-to-income ratio
Credit impact on business loans
 Practice acquisition & start-up loans
 Low level of debt generally means:
 Higher credit limit / Lower interest rate
 High debt generally means:
 Lower credit limit / Higher interest rate
How credit affects interest rate
Credit score
Rate
Practice loan payment*
770 +
6.88%
$3,465
730
7.30%
$3,530 ($7,800)
700
7.71%
$3,594 ($15,480)
660
8.53%
$3,724 ($31,080)
Below 650
Applicant may not be approved for credit
* Payments based on a 10 year, $300,000 practice loan
Credit impact on business loans
 Lower credit limit / higher interest rate =
 Less money to purchase / start a practice
 Less ability to develop a competitive operation
 Fewer funds for start-up salaries, marketing, overhead
 Less profit due to higher loan expenses
 Potentially decreased opportunity for success
Credit impact on business loans
 Good credit is critical to your ultimate personal &
business success
 The good news: You can build & manage your credit
profile
How credit scores
are calculated
How credit scores are calculated
 FICO (formerly Fair Isaac Corporation) score:
 A numerical expression representing your credit worthiness
 Based on statistical analysis of your credit files
 Primarily used in credit reports accessed by lenders, other
companies
How credit scores are calculated
 Credit scores range from 350-850
 723 is median score for Americans*
 Scores below 600 considered high risk borrowers
 620 = dividing line between “good” and “bad”
 640+ = “pretty good”
 720+ = “excellent”
* Source: www.creditscoring.com/average/
Five factors for calculating credit scores
Credit factor
% of
total
score
Payment history
35%
Have you made your payments on time?
Outstanding debt
30%
How much do you owe?
Credit history
15%
What is length of your credit history?
Pursuit of new credit
10%
Have you made numerous applications
for new credit?
Are you taking on more debt?
Types of credit in use
10%
Do you use a variety of credit types?
Source: www.myfico.com/crediteducation/whatsinyourscore.aspx
Considerations for improving
your score
National distribution of credit scores, 2010
45%
40%
40%
35%
30%
25%
20%
18%
15%
15%
10%
15%
12%
5%
0%
750 - 850
700 - 749
650 - 699
600 - 649
What score is too low for consideration?
Source: www.creditscoring.com/average/
300 - 599
How credit scores are calculated
• People with same credit score can have very
different credit profiles
- More or fewer accounts
- Different mix of accounts
- Longer or shorter credit history
- Use of more or less of available credit
• The same action can have different effects on people
with the same score
Five actions that can
ruin your credit score
Actions that can ruin your score
 Maximized credit card
 30-day late payment
 Debt settlement
 Foreclosure
 Bankruptcy
Five credit score killers
1. Maxing out a credit card
 Puts you at risk of over-limit fees
 Considered a sign you are getting in over your head
 Doesn’t matter to score formula if you carry a balance or
pay off the card when you get your bill
 Action: Don’t use all credit available to you
Source: FICO; 5 Ways to Kill Your Credit Scores, Liz Pulliam Weston, MSN Money, November 12, 2009
Five credit score killers
2. Skipping a payment
 Problem if you miss entire payment cycle
 Can drop a good borrower with a 680 score into subprime
credit territory
 Action: Set up automatic payments if possible to
avoid big drop in score from overlooked payment
Source: FICO; 5 Ways to Kill Your Credit Scores, Liz Pulliam Weston, MSN Money, November 12, 2009
Five credit score killers
3. Settling a credit card debt
 Debt settlement negotiations can drag on for months
 Each missed payment takes another bite out of your score
 Amount of debt your creditor “forgives” is typically added
to taxable income
 Action: Try working out a payment plan rather than
settling debt
Source: FICO; 5 Ways to Kill Your Credit Scores, Liz Pulliam Weston, MSN Money, November 12, 2009
Five credit score killers
4. Losing a property to foreclosure
 Severe blow to your credit score
 Implications for your future ability to get a mortgage
• Lenders may not extend another home loan for 2-4 years
Source: FICO; 5 Ways to Kill Your Credit Scores, Liz Pulliam Weston, MSN Money, November 12, 2009
Five credit score killers
5. Filing for bankruptcy
 Called the “nuclear bomb” of credit actions
 Both higher and lower scorers end up near bottom
 Getting new credit extremely difficult
 Action: Explore other possibilities: forbearance,
credit counseling, debt settlement
Source: FICO; 5 Ways to Kill Your Credit Scores, Liz Pulliam Weston, MSN Money, November 12, 2009
10 steps to a healthy
financial profile
10 steps to a healthy financial profile
1. Maintain at least 2-3 different types of credit
accounts
 Revolving loans
• Credit cards / lines of credit
 Installment loans
• Mortgages / auto loans / personal loans
 Indicates you are credit worthy & able to manage debt
10 steps to a healthy financial profile
2. Avoid applying for credit from too many
sources
 Multiple credit inquiries negatively impact credit rating
 Especially within a short timeframe
10 steps to a healthy financial profile
3. Demonstrate you can use credit wisely
 Do not use all the credit available to you
• Below 30% utilization is good
• Below 10% is better
10 steps to a healthy financial profile
4. Make on-time monthly payments
 Always!
 On credit cards, mortgages, installment loans, student
loans
 Remember: Most service providers do report late
payments/collections to credit bureaus
• Cell phone companies, health clubs, medical offices, others
10 steps to a healthy financial profile
5. Consolidate personal loans
 Can improve your cash flow
 Generates a better financial profile
10 steps to a healthy financial profile
6. Continue payments during dispute
 If in dispute with a creditor, continue to make minimum
monthly payments while you work towards a resolution
• Shows good will
• Preserves credit rating
10 steps to a healthy financial profile
7. Notify creditors in writing of your address
change
 Ensures statements reach you promptly following a move
 No “forgiveness” by credit bureaus for lost bills / delayed
payments during a move
10 steps to a healthy financial profile
8. Avoid co-signing and/or guarantying a loan
for friends or family members
 Has the same impact on your credit as if you were the
primary borrower
 Uncontrollable risk to your credit standing
10 steps to a healthy financial profile
9. Protect your identity
 Review your credit report at least once a year
 www.annualcreditreport.com
 www.experian.com
 www.transunion.com
 www.equifax.com
 Inform all credit bureaus of any discrepancies in writing
10 steps to a healthy financial profile
10. Keep copies of all relevant documents
 Agreements / documents clearing judgments or liens
 Letters from creditors clearing incorrect information
reported on loan history
 Remember: All credit information stays in your records for
up to 10 years
In summary
 Your credit profile forms the basis of all your
financial investments
 An inadequate profile can cost you money in higher
interest rates and lower credit limits
 A poor profile can impact your ability to build a solid
foundation for practice success
 You have control over the quality of your financial
profile
Thank you
Kathy Ells
Wells Fargo Practice Finance
wellsfargo.com/dentist
© 2011 Wells Fargo Bank N.A. All rights reserved. Wells Fargo Practice Finance is a division of Wells Fargo Bank, N.A. For public use.
Presentation materials are provided for general information only and do not constitute, nor are they intended as, a substitute for consultation with accounting, tax, legal
or other professional advisors.
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