Understanding Your Credit Makes Borrowing Easier

People associate doctors with financial wealth, and there’s some data to support that idea. For example, a 2022 salary report says the average specialist makes about $368,000 a year, and many earn far more. That’s about five times the median household income in the U.S. Problems with credit would seem unlikely.

Yet, as many doctors in private practice know, strong revenue and a high annual salary do not always translate into good credit scores. A medical practice is a small business and has many of the same problems making timely payments and managing credit lines that plague small companies in every industry.

“Doctors are known for treating patients, not for managing their bills,” said one of Nitra’s risk advisors, an expert in credit and risk management with more than 25 years of experience.  “Small business owners have a cash management job. It can be challenging. You can have a profitable business, but if you don't manage your cash well, you can end up with credit problems.”

To help you understand the credit system and increase your scores, Nitra turned to its advisors to determine practical steps that every practice can take to improve credit reports. They explained how to separate personal and business credit, establish credit for a practice, manage debt and actively monitor scores. To learn more, read on.

Understanding Credit Scores

The U.S. credit system is complicated, but the basics are relatively simple to understand. Credit scores are used by banks, credit card companies and other lenders to determine the overall financial health of a person or a business, and therefore how likely it is that a borrower will repay a loan. That, in turn, has an impact on how much credit is extended (and at what interest rate), whether it is through a loan, a credit card or purchasing capacity through a vendor.

Generally speaking, doctors want good personal and business credit so they have the ability to borrow. Personal credit scores and business credit scores are different, though they operate similarly. It helps to look at personal credit scores first because most people have some experience with them. If you have financed a house or a car, you have likely dealt with credit scores.

Though there are several different types of credit scores, the most commonly used for personal credit are FICO scores, named for the company that created them in the late 1980s (the Fair Isaac Corporation). Scores range from 300 to 850, with a higher score being “better” or more creditworthy. Scores in the high 600s or above are considered solid. A score of 720 or higher is generally considered outstanding. FICO scores are tied to your social security number and based on financial information tracked by credit bureaus such as Experian, Equifax and TransUnion, each of which operates independently and issues its own FICO score. While these should generally align, they can often be slightly different and it is common for people who care about their credit to monitor all three.  

FICO scores can be impacted by many factors, including your payment history, the length of that history, the amount of credit you have, how much of that credit is in use, the mix of credit types and more. Timely payments are generally considered the most important factor. While personal credit scores are considered private, there are many services, some free and some paid, that can help you keep an eye on your scores. Each credit bureau is also required to give you a copy of your credit report every year at no charge.  

Personal Versus Business Credit

Business credit is separate from personal credit, meaning a doctor can have very positive personal credit scores but their practice will have a separate set of business credit scores that may reflect a different reality.  The two systems operate similarly. However, unlike the world of personal credit, where FICO scores dominate, there are many different types of business credit scores. Many, though not all, operate on a score of 0 to 100, with higher scores being better, and these scores are tied to your company’s tax ID, or EIN number. Unlike personal credit, business credit scores are not considered private and can be checked by anyone. Monitoring business credit often requires engaging a paid service.

Business credit scores reflect information collected by credit bureaus and each of these bureaus reports its own business credit score. For example, Dun & Bradstreet offers what they call a PAYDEX score; Experian offers Intelliscore Plus; and Equifax offers several products. On most scales, a score of 75 would be considered solid credit. FICO too offers a business credit score, known as the Small Business Scoring Service (SBSS), which has its own scale and draws information from the credit bureaus. This score is used by the Small Business Administration to evaluate loan applications.    

Like personal credit scores, business credit scores are impacted by factors such as payment history, the length of that history, the amount of credit and its utilization. But additional factors can also come into play, such as the industry you are in, the size of your firm and the amount of time it has been in business. The factors that matter can vary depending on which bureau is issuing the score. Some focus on timely payments while others use a mix of factors.

While it is common for doctors to use personal credit to start a practice, there are advantages to separating personal and business credit. Strong business credit makes it easier for your practice to borrow at lower rates, can lower insurance costs and can decrease personal liability. Using personal credit can increase both costs and risks. If the business encounters difficulty and fails to pay bills on time, your personal credit report will reflect those problems, making it harder (and often more expensive) to buy a car, refinance a home, secure college loans or do anything else that requires borrowing money.

Establishing Business Credit

At the same time, business credit often presents young medical practices with a dilemma. Lenders often want to see some time in operation in order to extend credit. Yet a new practice has no such record and needs capital to launch. Thankfully, there are ways to build business credit.    

• Establish Credit With Vendors. Vendors who are eager to sell your practice supplies will often extend credit. Take advantage of this in order to establish a record of borrowing and repaying on time.
  
• Apply for a Business Credit Card. Lenders that offer business credit cards are often used to dealing with small companies and may be willing to extend credit to facilitate a startup. Nitra, for example, offers the Nitra Visa Business Card, which was designed for doctors in private practice.
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• Maintain Strong Personal Credit. When building business credit for your practice, it helps if your personal credit scores are strong. If that is not the case, there’s much that can be done to fix credit scores in a relatively short amount of time.

Overall, the goal is to gain access to whatever startup capital you can and establish a solid payment record. This will result in better scores and access to more capital over time.

How to Build Better Credit Scores

While the credit system can be complicated, there are some best practices that experts agree can help improve both personal and business credit scores. Many may seem obvious but others are less so.  

• Pay on Time. Many experts say the best thing a doctor can do to improve their credit scores is to pay bills on time. This is true for both personal and practice finances. Allowing any bill to go past 30 days almost always ensures that there will be negative repercussions on a credit report. Smart practices put payment systems in place that are easy to monitor and that ensure continuity, so that bills get paid even in the face of employee turnover and busy schedules.
  
  In the event that you do have a late payment on your credit report, there are some steps you can take. For example, you can write a letter to your lender, often called a “goodwill letter,” explaining why the payment was late, promising that it will not happen again and asking them to “forgive” the matter and remove the negative mark from your credit. Creditors are under no obligation to honor your request, but they sometimes do and it won’t hurt to ask.

• Manage Credit Utilization. Maxing out cards and loans often has a negative impact on credit scores. However—and this may seem counterintuitive—unused lines of credit can also have a negative impact. Credit bureaus want to see practices using and repaying credit. One common benchmark is 25 percent. A practice that is using 25 percent of its credit line, and therefore has 75 percent available, is considered to be in solid shape.
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• Get Serious About Monitoring. Credit scores should not be a mystery because monitoring is relatively simple. Using a service, whether free or paid, doctors can easily monitor personal and business credit scores, and doing so is a good idea. Just as you check bank balances regularly, you can check credit scores and ensure they remain healthy. If there are problems, you can catch them early and make adjustments.
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• Fix Credit Mistakes. Credit bureaus make mistakes. They report information that is out of date. There can be errors on any credit report and you have the ability to fix them. All credit bureaus have a mechanism to file disputes and most are available online. If there is something inaccurate on your report, you can challenge it with a letter and supporting documentation. You can also make sure that credit bureaus have basic information such as address and employer listed correctly.
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• Be Realistic. The credit system relies on large companies communicating with one another and that means changes do not take place overnight. Most changes to personal or business credit will take weeks to reflect on a credit report. If you are cleaning up credit, know that it will take some time and be patient. The results are worthwhile.

While credit can seem complicated, the truth is that it can be monitored and improved. If you have credit problems, they can be fixed over time. Scores can then be monitored to ensure they remain solid. While it may seem like busy work, this is time well spent. Access to credit is important. It allows your practice to weather mistakes in billing, dips in revenue and or any other obstacle that makes it difficult to operate. In short, it allows you to know that the bills will always be paid and that you can operate with confidence.

To learn what the Nitra Visa Business Card can do for your practice, tour our services or call (845) 443-7752 to consult with a Nitra specialist about your needs.

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