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.