Do a checkup on your debt

Physicians often have to deal with medical school debt decades into their careers, and even those fortunate enough to be clear of school loans may find themselves with debts arising from lifestyle choices. If the number of loans or amount of debt has become unwieldy, debt consolidation may be an option.

Medical Economics® spoke with Chris Panebianco, chief marketing officer for Bankers Healthcare Group in Davie, Florida, about how debt consolidation works and debt-management strategies physicians should consider. This interview was edited for length and clarity.

Medical Economics® (ME): Who is a candidate for debt consolidation?

Chris Panebianco: I think anyone is. If you’re a physician with multiple debts, if you want to simplify your monthly payments, or if you are just looking to improve your credit score — anyone in those categories is someone who should really consider debt consolidation.

ME: What is the benefit of consolidating debts? What makes the difference whether you have 10 small payments or one big one?

Panebianco: The first thing I think of, with COVID-19 and all the stress of life, is managing those payments. With fewer payments, there are fewer balances and fewer due dates, with less of a chance to be late. It also helps improve your credit; paying off debt can decrease your credit utilization and actually opens you up to other opportunities. On the other side, it is a good exercise in better financial planning. You can adjust your way of life to that monthly payment and oftentimes save money. The increased cash flow will allow you to potentially have more money to work with each month.

ME: You mentioned improving your credit rating. How big of an impact is there on your rating if you close out some of those smaller accounts and consolidate them into one?

Panebianco: Typically, you don’t want to close them. But a lot of lenders, if you’re going for other types of loans or a mortgage, they’re looking at your debt-to-income ratio, the amount of debt you have compared with how much you make, but they also look at your credit utilization. And that’s what factors, in large part,into your FICO score. The more you can control that and open up other lines, the better your credit can be.

ME: If physicians want to consolidate their debts, what questions should they ask potential lenders?

Panebianco: First, what type of rate? Loans typically have a fixed or variable rate, so you want to see what that means for you and how it affects your payment. You want to see if they require personal collateral. One of the big disadvantages with many loans is that you’re signing off some of your personal assets. You also want to ask what is the repayment term? The longer the length of your loan, the higher the amount of interest [in the long run], but [with a longer loan comes a smaller monthly payment], which helps you. The other question is, will this application or loan appear on my credit report? That’s a very big question. Again, that’s what other lenders are looking for. It affects your FICO score.

ME: What is the application procoess??

Panebianco: It’s a very important step. Physicians are busy, you already have a lot to handle with COVID-19 with your practice and outside of the office. You want to make sure that it’s something that’s very easily obtained. And then you want to really look at what’s the process beyond that. Howsoon will it be processed? Typically, traditional lending tends to take longer, and there are [small business] loans, as well, which historically have taken longer. Some of the online lenders are much faster. But there are different requirements for each. You want to weigh each one of these. Then there is the approval. How quickly can I get my funds? That’s a big thing, especially if you’re trying to buy new equipment. If you’re trying to buy into a practice or anything to do with your business, speed is essential. And lastly, you want to understand that the lender knows who you are. You want someone who’s going to take good care of you, who understands your business, who understands the challenges you face and how quickly you need capital.

ME: One of the things you mentioned was fixed rate versus variable rate. With interest rates so low, is that as big a decision as it used to be?

Panebianco: It really depends. It’s going to fluctuate based on the market conditions. With a fixed rate, you’re always going to know what the interest costs will be. It’s more predictable and you can manage that. The adjustable rates tend to move and that can have bigger consequences in your payment; [the rate] can adjust and you may not be prepared for that.

ME: Are there common mistakes doctors make with debt that ends up costing them money?

Panebianco: The average debt for an American is approximately $20,000 between credit cards and personal loans. When you factor in auto installment loans and mortgages, the average national debt for an American is more than $90,000. A lot of times when you dig into that debt, you see that individuals have maxed out all of their cards, they’re not paying attention to that available credit. They might have loans with multiple lenders, going from one lender to another with multiple loans for different uses. But they’re only able to make minimum payments. That’s one of the things that we see a lot of people do. They say, well, the payment that was listed on my statement was $50. But that’s the minimum payment due, and you’re not eating into the interest, you’re actually hurting yourself in the long term. Credit card companies have to put out statements that show you how long it’ll take to pay that off, and it’s a much, much longer term [if you only pay the minimum each month]. So, although it might be affordable, you can get yourself in trouble very quickly. We also commonly see that people have lost track of what expenses they have to pay on what date, and they may not have things set up for auto pay. That can get you in trouble.

ME: A lot of physicians really have to save to get through medical school and residency, then they come out of residency, they get that job, and they’re awash with cash. Do you see instances where they just kind of lose track because they have so much money now, they’re maybe being a little reckless?

Panebianco: I think you see it commonly as people’s income goes up and their expenses go up. The monthly available income is there, and they may not be as disciplined as they were on a smaller budget. I think it’s a problem that when someone makes more money, they tend to spend more. What we see is a lot of people look at the monthly payment and they live by the monthly payment. I think that’s pretty common throughout the United States. That’s affordable, but they don’t look at the inner workings of their expenses. So you can stretch out a loan payment, you are going to pay more interest, but it is affordable for right now. It’s something people should be aware of, and they should do their own their own checkup on their finances.

ME: Just because you can afford it doesn’t mean you should ignore the rates and the inner workings of the loans that you have?

Panebianco: Exactly. You want to look at everything. Those lenders have to spell that out for you. It’s what you see now if you’re going to take out a longer-term loan — you want to look at what the prepayment penalty is because you may not really worry about the interest. It’s about that monthly payment because you may pay it back in a year. Make sure to check to see if there are prepayment penalties or if there are balloon payments if you’re not on a fixed-rate loan. Those are all the things that you have to educate yourself on and your lender should help you through that.

ME: Is it ever too late in a career to tackle debt problems?

Panebianco: You’re never too old for that. It only takes a few minutes to check on it each month. If you create a process, it’ll be easier going forward. It’s going to be painful, at first, but I think you’re never too old, you’re never too far into your career to go back and sit down and start at the basics.