The policymakers forecasted continued interest rate increases by an additional 0.5% through 2023, which by design would make borrowing more expensive and should decrease the amount of money in circulation and lower inflation.

So let’s take a closer look on how rising interest rates can affect you in your daily life.

How do rising interest rates affect my credit card?

Credit card companies typically base rates on banks’ prime rates which move in tandem with the Fed, which means your borrowing costs are increasing. 

The average credit card interest rate as of July 15, 2022 is 22.91%, the highest rate since August 2019. In comparison, the average rate last year was 16.45%.

The best way to handle the increased interest rates on credit cards is to pay off your balance in full each month. If you are unable to pay your balance off each month, consider acquiring extra funds through other methods with lower interest rates, like personal loans.

How do rising interest rates affect my personal loan?

Personal loans are not always affected the same as other consumer products. The impact depends on whether you already have a loan or are looking to get one and whether the loan rate is fixed or variable.

Fixed vs. variable loan interest rates

Most personal loans are fixed-rate loans, meaning your annual percentage rate is not dependent on market factors. Once you obtain a fixed-rate personal loan, your rate will stay the same over the course of the loan. 

For those who already have personal loans, this means you don’t have to worry about these rate increases, but for those currently in the market for one, higher rates could impact your decision.

Is now a good time to get a personal loan for doctors?

Though rates are high, they may get higher over the next few months. If you are in need of a personal loan, getting one now could save you from that higher rate if rates increase. If you aren’t sure if you need a loan, we recommend not rushing into the process simply to lock in a low rate.  

If you are in need of extra cash without the ability to pay off your need each month, personal loans are a better option than the most common alternative, high-interest credit cards. Credit card rates are also increasing significantly and could result in significantly increased interest expense over time.

How do rising interest rates affect my student loans?

The rising interest rates shouldn’t have a significant effect on federal student loan borrowers at this time, but those with private loans could expect increasing rates. 

How will rising rates affect my federal student loans?

The student loan payment moratorium that began in March 2020 has been extended to 2023. All federal student loans have had a set interest rate of 0% and therefore aren’t affected by rising rates at this time. Additionally, federal student loans have been bound by fixed rates since 2006. Only federal borrowers who received a variable-rate student loan before July 2006 would experience a higher rate.

How will rising rates affect my private student loans?

On the other hand, private student loans are not bound by a moratorium thus they will be likely affected by the rising rates, depending on the terms. If you have a variable-rate private student loan, you will experience higher interest rates and the fixed rates you are being offered are likely to increase as well.

One way to manage these rising rates is by refinancing to a lower, fixed-rate loan before rates increase. Check out our guide to finding out if refinancing would be right for you.  

How do rising interest rates affect my high-yield savings account?

As interest rates rise on consumer loans and other products, they also increase on high-yield savings accounts, meaning you earn more. 

Depending on your bank, you can expect an increase in your annual percentage yield (APY). The higher your APY, the more money you will make passively.

What should I expect with Federal Reserve rate increases?

The Federal Reserve uses rate increases to bring inflation to a more reasonable and sustainable rate. These increases attempt to shrink the supply of money available to make purchases, making money more expensive.

As interest rates rise, consumers typically slow their spending, especially on major purchases, because of the substantial rates that will affect a loan long term. 

Though rising rates are a hopeful step toward a less volatile economy, some worry these actions could tip the economy into a recession. An example of this happened in 1980 and 1981. During this time, inflation rose to 14% and the Fed raised rates to 19%. This pushed the country into a severe recession but remedied the extreme inflation rates consumers were battling.

There is no certain way to predict what effect rising rates will have on the economy, but ideally, they will lead to a soft landing where the economy slows enough to temper employment and wage increases without entering a recession.

How Panacea Financial can help you deal with rising interest rates?

Despite the ever changing economy, Panacea Financial is committed to working in the interest of our customers. That is why we offer competitive rates on personal loans, practice loans and student loan refinancing. We also just raised our rates on our high-yield savings accounts to help you grow your money faster as you save.

If you are feeling overwhelmed by the thought of adapting your budget and financial plan to the changing economy, we can connect you with a financial or wealth advisor through our Build Your Team program.

Panacea Financial, a division of Primis. Member FDIC.

Medical, dental and veterinary professionals endure years of education and training to be well equipped to serve their patients. Despite the years of learning, doctors often graduate with little financial knowledge. 

This lack of knowledge can be detrimental to doctors’ long-term financial health. One financial concept that doctors will encounter often as they search for loan products is debt-to-income (DTI) ratio. If you are not sure what DTI means or how to improve your DTI, we are sharing the basics of this financial metric!

What does debt-to-income ratio mean?

DTI ratio is a financial metric used by lenders and other financial institutions to compare a borrower’s debt to their income. This value can be indicative of an individual’s financial health.

Example of debt-to-income ratio

Kelly is a medical resident, who is interested in getting a loan to help with car repairs. She is trying to figure out her debt-to-income ratio. Take a look at Kelly’s monthly bills and income:

• Mortgage: $900
• Credit cards: $500
• Student loans: $400
• Car loan: $300
• Gross income: $5,330

Kelly’s debt is:

$900 + $500 + $400 + $300 = $2,100

Kelly’s debt-to-income ratio is: 

$2,100 / $5,330 = .393

Kelly has a 39.3% debt-to-income ratio.

How does debt-to-income ratio affect me?

DTI ratios are used by lenders when making credit decisions. Various financial institutions will use it for different loan products, but it is almost always used when obtaining a mortgage. 

What is a good debt-to-income ratio?

Lenders have different DTI ratio cut-offs depending on the product. For instance, a favorable DTI ratio is often considered 43% or lower. A debt-to-income ratio of over 50% may indicate that an individual may have a hard time paying their monthly payments on any debt. The lower a DTI ratio, the more attractive a borrower will look to a lender.

Because of significant student debt, residents and trainees can have debt-to-income ratios in the triple digits. Because school and training is so expensive, this is typically unavoidable, but most lenders only consider the value of the metric without considering the reason for the high debt level. This is one of the many frustrations our doctor co-founders faced when trying to navigate their finances.

What is the problem with debt-to-income ratio?

DTI ratios can be extremely limiting, especially when considering the unique financial lifecycles of doctors. DTIs don’t take into account the type of debt or the cost of servicing the debt. 

For instance, student loans are viewed the same as credit card debt, despite student loans being acquired as an investment in your career and lifetime earning potential and credit card debt carrying higher interest rates. One note on student loans is, if you are on an Income Driven Repayment plan for federal loans this could lower your monthly “debt” payment and therefore decrease your DTI. 

How to prevent a high debt-to-income ratio?

The best way to deal with a high DTI ratio is to prevent it in the first place. Student loan debt is unavoidable for many doctors, but there are ways to reduce the burden. Here are some suggestions you may want to consider:

• Consider the cost of your schooling. We know this can be difficult to avoid. But if you are fortunate enough to get accepted into multiple medical, dental, or veterinary schools, take their costs and cost of living into consideration. If you are looking at dental residencies, try to find one that either pays a stipend or has less expensive costs.
• Minimize your expenses. As a student and resident, we recommend living frugally to prevent piling additional debt on top of your student loans or borrowing more than you need.
• Avoid lifestyle creep as a practicing doctor.  After residency, it can be easy to overspend due to a drastic income increase. Buying new cars or indulging in expensive purchases can be detrimental to your long-term financial health.

How do I improve my debt-to-income ratio?

If you have already dug yourself into a deep hole, don’t worry. You may face difficulty if searching for loans, but you can overcome and improve your financial metrics! The main ways to improve a DTI ratio is by raising income and lowering debt. 

For some doctors and doctors-in-training, raising income may not be a viable long-term option because of the time commitment needed from their profession. Some practicing doctors may benefit from a second job or side hustle. 

According to Medscape, 37% of physicians have a side gig. Common examples of these secondary jobs include medical consulting, chart review, real estate and investing.

If taking on a greater workload is not a possibility, your best course of action is to lower your debt. Ways to lower your debt include:

• Reverse some of your larger purchases. If you purchased a new car or home before considering the financial implications, you may want to consider downsizing. 
• Refinance your student loans. Unless you are considering Public Service Loan Forgiveness or need IDR repayment options on Federal Loans, refinancing your student loans may save you on interest.
• Avoid taking on more debt. If your goal is to pay down your debt load, the last thing you want to do is take on more. Live as frugally as you can to avoid an even greater burden.
• Monitor your progress. As you lower your debt burden, keep an eye on your improved debt load and DTI. Watching these numbers fall can provide motivation to continue your journey to financial freedom.

How can I get a loan if my debt-to-income ratio is not ideal?

Even with aggressive efforts to improve DTI ratio, it may take some doctors years to make meaningful changes to their financial metrics. 

If your DTI ratio is holding you back from financial products that you need, there are options that could work for you. Panacea Financial knows the complexities of doctors’ financial lifecycles because our founders have been there themselves, as practicing doctors. That’s why we don’t use DTI or have a minimum credit score to approve doctors for a PRN Personal Loan. 

If you are needing extra cash for residency relocation, car repairs or any other need, our PRN Personal Loan can offer you the help you need, even when other lenders see you as a risk. Visit our PRN Personal Loan page to learn more and apply!

Before you go…

Financial knowledge is your greatest tool to set yourself up for financial success. If you are interested in learning more about financial topics, visit our Resources page or check out one of our curated topics below. 

• How Can Doctors Avoid Lifestyle Creep?
• Finding a Practice Lender & Bank: Choosing Wisely Today for Your Practice Tomorrow
• A Doctor’s Guide to Refinancing Student Loans
• Why Monthly Budgeting is Critical for Physicians in Training

When searching for financial products, “credit check” is a phrase used often, but what does it mean and how does it affect doctors in need of financing?

Credit checks — also known as “credit inquiries” or “credit pulls” — refer to the action of reviewing your credit score and credit history, but it is important to understand the difference between hard and soft credit checks. 

What is a hard credit check? 

Hard inquiries take place when a financial institution, like a bank or credit card company, checks your credit before making a lending decision. If you are applying for a personal loan, mortgage or credit card, you will likely experience a hard credit inquiry. These require you to give written consent for a credit check.

How does a hard inquiry affect me? 

Hard credit checks can affect your credit score, typically lowering it by five or fewer points. The damage to your score is removed from your credit report after 24 months, but your score could improve before those two years. Many consumers won’t see their score affected by the credit check after one year.

Just one hard credit check shouldn’t significantly affect your approval for a loan or credit card, but hard credit inquiries can become problematic if done too frequently. Multiple checks in a short period of time can signal to the lender or credit card company that you are low on money or will be racking up a lot of debt in the future, which would make you a lending risk. 

One reason frequent hard credit checks can lower your credit score is that there is some data that suggests frequent hard credit checks are associated with an increased risk of not paying a financial institution back. According to FICO, individuals with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than those with no inquiries on their reports.

Examples of hard credit checks

Common hard inquiries include:

• Loan applications (mortgage, auto, student, personal, etc.)
• Credit card applications
• Requests for credit limit increases
• Applications for lines of credit
• New utility applications
• Apartment rental applications
• Collection agency skip tracing

What is a soft credit check?

Soft credit checks typically take place when an organization or individual reviews your credit score for a background check or pre-approved lending scenario. Unlike hard credit inquiries, institutions do not need your consent to perform these checks.

Do soft credit checks affect my credit score?

These inquiries will not affect your credit score and will only be seen on consumer disclosures. A consumer disclosure is the long version of your credit file and only you may request this document. It includes all inquiries on your file, including suppressed information.

Examples of soft credit checks

Common soft inquiries include: 

• Personal credit checks
• Pre-qualified credit card offers
• Pre-qualified insurance quotes
• Employment verification (i.e., background check)

Is checking my own credit score a hard or soft credit inquiry?

Checking your personal credit score is considered a soft credit check, so your credit score will not be affected by this action. In fact, checking your credit score and report frequently is encouraged. At minimum, you should check it once a year. 

Checking your credit information regularly will help ensure it is correct and there have been no breaches of your personal data. Watch out for signs of identity theft like incorrect information or errors like outdated information or payments wrongly reported as late.

Will shopping for the best rate affect my credit score?

Rate shopping is the exception to the negative effect multiple inquiries can have on your credit score. Looking for the best rate is financially responsible, and credit scoring models treat them as such. 

As long as the multiple inquiries take place within a 45-day window, FICO considers all auto loan, student loan and mortgage inquiries as one hard check. VantageScore works similarly — treating all inquiries within a 14-day window as one, regardless of type.

Bottom line

You will encounter credit checks throughout your life. Whether purchasing a house, opening a new credit card, or searching for a loan, these inquiries shouldn’t affect you and your credit score too much, as long as you understand how to search and rate shop strategically. 

At Panacea Financial, we understand that even a small dip in credit score can have a significant effect on doctors, especially those in training or early in practice. That is why we only use soft credit checks when you apply for a PRN Personal Loan or Student Loan Refinance.

For more information about credit scores, loans and more, visit our Resources page or check out one of our featured articles: 

• Credit score: How Doctors Can Improve Their Credit Score & Other Common Credit Score Questions
• Personal Loans: Personal Loans for Doctors: What You Need to Know
• Practice Loans: Finding a Practice Lender & Bank: Choosing Wisely Today for Your Practice Tomorrow