Physiatry Practice Management Resources

Most physicians have little trouble obtaining all the credit they need for whatever they want to buy. Doctors' income levels and professional security give lending institutions confidence that they are good credit risks. But with lenders clamoring to loan you money and interest rates at historic lows, it's easy to get in over your head. Understanding your motives and spending priorities before you borrow, as well as which credit sources are most advantageous, can help you be a savvy-and wary-credit consumer.

"Just because someone will lend you money doesn't mean it's a good thing for you to do," says Steve Rhode, co-founder and president of Myvesta.com, a non-profit debt and financial management organization based in Rockville, Md. While that may sound obvious, doctors are prime candidates for overspending on credit.

"It can be a problem for doctors, just like certain other professionals, who feel they need to maintain a certain image or status or class in the community," says Mr. Rhode. "So they end up spending to live in that neighborhood, drive that car, do those things, whether or not their income can support it." Declining incomes are a fact of life for some physicians, especially those with large Medicare practices.

To help prevent credit overindulgence, one of the first things some financial planners do is have clients make a wish list of all the things they want, or want to do, and assign a dollar value to them, to see what it will all cost. Then they can set their spending priorities. New doctors often fail to do that, says Mike Dubis, a certified financial planner and president of Touchstone Financial Planning in Madison, Wis. "I see no organization or goals in mind," he says. "They just go out and spend quickly," digging themselves into a hole.

The next step is to see what your income can support by developing an awareness of your cash flow. Mr. Dubis recommends doing a basic budget detailing how much money comes in, where it all goes and how much is left over. "If doctors don't have this awareness, banks and credit card companies are going to tell them whatever they want to hear."

Different Standards

This means that doctors may not be held to the overall debt-to-income ratios that lenders impose on others. What constitutes a reasonable amount of debt is to a certain extent a matter of individual tolerance. Mr. Dubis says a "healthy" percentage is 30 percent to 40 percent of your gross income. "If you push 50 percent in your first few years starting out," he cautions, "know where your money is going to come from the next few years." Debt levels in the range of 50 percent to 75 percent of income, he says are "beyond tolerance."

Mr. Rhode takes a different approach to defining reasonable debt: "As long as your expenses, minus savings, are less than your total income, you're in good shape." The problem with debt ratios, he adds, is "nobody lives their life like that."

Financial advisers often speak of "good" and "bad" debt. Good debt carries lower interest rates and the interest is tax-deductible, like mortgages and home-equity loans. Bad debt carries higher rates and is not tax-deductible-like credit card balances. "Good debt vs. bad debt is a very subjective question," says Mr. Dubis. For some people, "no debt is good debt."

Regardless of the kind of credit you need, experts emphasize the value of shopping around. Interest rates and borrowing costs vary from lender to lender. Credit unions are usually low-cost credit sources, says Mr. Dubis, and doctors may get good deals from local bankers, particularly for mortgages. When borrowing, get several preliminary quotes, he says, but only allow a credit check for the one or two lenders you are seriously considering. Frequent credit checks can work against you.

Here's a rundown of the pros and cons of various types of credit:

Mr. Dubis cautions against overspending, though, and ending up a slave to a house. "I think bankers are allowing some doctors to take on way too much debt when they first start out," he says. "Sure, the doctors can pay for it, but they can't pay for anything else."

Refinancing. Lewis Wallensky, a certified financial planner in Los Angeles, says refinancing your mortgage makes sense when it can lower your monthly payment, pay the mortgage off faster or get cash out to pay off high-interest, non tax-deductible debt.

However, refinancing may not make sense if you're going to move in a few years. It could take at least three to five years, says Mr. Dubis, to recover refinancing fees. "You have to start figuring out what the break-even date is," he says.

But Mr. Rhodes sounds a cautious note: "The reason the rate is low is because there is less risk for the lender and more for you." That is, if you can't pay the loan, the lender takes your house. "If you've been living a lifestyle you can't afford using borrowed money, consolidating your debts doesn't stop the negative money behavior," he adds.

Student Loans. On July 1, student loan interest rates dropped to lows not seen in decades-as low as 3.42 percent for some loans-providing an attractive consolidation opportunity, but not for everyone.

For one thing, although interest on student loans is tax-deductible for many, that tax savings is often not available in a doctor's income bracket. In such cases, Ms. Barrett might recommend taking a home-equity loan to pay those debts.

Mr. Dubis points out that student loan debt consolidation may not bring the debt obligation down; if you go from a 10-year to 25-year repayment period, you will pay a lot more interest overall.

Nevertheless, lower payments may improve your cash flow.

Married doctors should not consolidate their loans together, he adds. Many student loans can be discharged in the event of permanent disability or death of the borrower, but if spouses consolidate them jointly, the other spouse becomes responsible for the loan.

<Car loans. "The one opportunity people are missing is refinancing their cars," says Mr. Rhode. If you bought a car in the last few years, he says, you can now refinance it at a lower rate. Rates were in the 5 percent range as of press time.

Many experts think car loans aren't a good use of credit, since you are borrowing for a depreciating asset. "After you've been in the work force for 10 years, you should be paying cash for your cars," says Ms. Barrett.

Credit Cards. Mr. Rhode says that 26 percent of consumers say they don't know the interest rate on their credit cards. "Utilize the junk mail that comes through your door by looking at the offers you're getting and using those offers to call your creditors and try to get the same or lower rate," he advises.

Don't be tempted by low teaser rates, Mr. Dubis warns, and don't bounce balances from card to card. He suggests using a pure fixed-rate card and limiting the number of cards to three or four per family.