The Importance of a Dentist’s FICO Score in Obtaining a Loan to Purchase, Build, or Expand a Dental Practice

There are many financial factors that a lender will consider in determining whether a dentist qualifies for a loan to purchase a dental practice, build a new practice, or expand an existing practice.  One factor that a lender will use to determine your creditworthiness is your credit score. 

Your credit score, which is usually referred to as a FICO score (named for Fair, Isaac and Company), is a numeric representation of your credit history compiled by the three major credit bureaus – Equifax, Experian, and TransUnion. The FICO score ranges from 300 to 850, and is calculated by each of the credit bureaus a little differently. For that reason, your score will vary slightly from company to company.  The following categories of information, along with their approximate weightings, are evaluated to determine your FICO score:

Payment History (35{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a}): Late payments on credit accounts will have the greatest negative effect on your credit score.  The credit bureaus will look at the number of late payments you have made, when you last made a late payment, the frequency of late payments, and the number of days that the payment was late.  Given the weight of this factor in determining your FICO score, it is imperative that you make timely payments on all of your credit accounts.

Outstanding Balances (30{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a}): The second most important consideration is your total balances in relation to your total available credit on revolving accounts. “Maxing out” multiple credit cards, for example, would result in a lower score because it indicates a higher risk of making payments late, or not at all. Accordingly, to increase your score, you should keep the ratio of outstanding balances to total available credit as low as possible.  Additionally, when you are close to a limit on a card, from a credit management standpoint it would be a good idea to pay down that account before reducing a higher balance on an account where you are nowhere near the limit.

Length of Credit History (15{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a}): The credit bureaus take into account the length of time that your credit accounts have been in existence. In general, the longer you have an account open, the better it is for your credit score.  For that reason, you should keep your oldest credit cards open, even if they are unused.

New Credit (10{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a}): Opening several credit accounts in a short period of time will negatively impact your score because the credit bureaus will deem you to be a greater credit risk.  Accordingly, you should only apply for a new credit card when you need it.

Types of Credit (10{c91082aefe0e580fe546c40af534787b48cfd474f8c9ab8dac50bf49a7a1c43a}): Your score will take into account the types of credit accounts you have (i.e., mortgage loans, car loans, credit cards, retail accounts, installment loans, etc.), and the number of each type of account.

Your FICO score can have a major impact not only on whether you can obtain a loan, but also the interest rate that you are charged once you have obtained a loan. The higher your score, the lower the interest rate you will qualify for.  A lower interest rate can save you thousands, if not tens of thousands of dollars over the life of the loan.  Therefore, before applying for a line of credit for a dental practice, or applying for a loan to purchase, build, or expand a dental practice, it is advisable to order your FICO score from (note: be sure to cancel your subscription after obtaining your score because it automatically renews on a monthly basis).  If your score is too low to obtain beneficial interest rates, it may be a good idea to delay the process and take steps to increase your score.  In addition to checking your FICO score, you should also pull your credit report before beginning the lending process. If possible, it is important to correct any errors before the lender reviews your report.

In addition to the typical documentation that a lender will look at in order to prequalify a dentist for a loan to purchase, build, or expand a dental practice (i.e., personal financial statements, current P&L statement, personal and business tax returns, curriculum vitae, business debt schedule, etc.), a lender will also look at the dentist’s FICO score. It is important to have a good understanding of the factors that are used to calculate your FICO score so that you can take the necessary steps to improve your score and ensure your ability to obtain a commercial loan at favorable terms.