Understanding Credit Scores
Credit scores are very important because people with a history of bad credit are viewed as a risk. They may end up paying a higher interest rate on a loan compared to someone with good credit. In Singapore, most of the time if you have bad credit you will not be able to get a loan. If you do not have any assets, your credit score is important because you will usually need a personal loan to tide over any pressing financial difficulties. In a general view, anyone with any kind of credit will usually have some sort of outstanding loan to his or her name. This makes credit scores relevant to everyone. A good credit score ensures the person can get any type of loan whenever they require it and at a good interest rate.
Credit scores measure the probability of a person going into default. It is usually represented by a three-digit number ranging from 300-850. The higher the credit score, the less risky it is to give that person a loan. In Singapore, credit scores are maintained by the Credit Bureau Singapore. This was established in 2002. CBS is a full member of the International Credit Bureau.
What is a credit score?
A credit score is a number generated by a credit bureau in Singapore, which is a reflection of your financial reputation. It is a number between 1000 and 2000 (in most cases) that signifies how likely you are to repay your loans based on your previous credit and payment behavior. With the credit score bands ranging from “AA” to “D”, you want your credit score to be as high as possible in order to get the best loan packages and terms from credit providers. Credit scores are used by credit providers to measure the risk of lending to you. In simpler terms, the better credit score you have, the more likely you will get your loan application approved and the higher chance of getting better terms off the loan. On the contrary, the worse the credit score, the harder you will find it to get loan applications approved and the loan terms will be less favorable with higher interest rates.
Importance of a good credit score
Just what is a credit score, and the need for knowing it, especially for a student at National University of Singapore (NUS)? Actually, most people who are intent on owning a credit card will at some point need to know what their credit score is. In layman’s language, a credit score is a quantified assessment of the creditworthiness of a person, based on past and current credit information which ends up on their credit report. Usually ranging from 0 to 1200 (for the credit bureau in Singapore), a high credit score typically means that a person is financially reliable and will have no trouble paying back their credit in the future. In contrast, a low credit score will mean that there is a probability that the person will default on payments, and thus damaging the likelihood of securing a loan. This leads us to the importance of credit score in which we shall look at the implications of people with good credit and bad credit. You are still young, and university life is about the journey and not the destination. However, in today’s context, not travel concession nor cash comes readily without a credit card and having a good credit standing. Usually, students get education loans from banks for a better education in private universities or to reduce the financial stress on their parents getting the loan. The bottom line is, education loans are a form of different credit facilities, so it is important to show from the start of your working life that you have been servicing your loan promptly when you need to apply for education loans at NUS for postgraduate courses. Now, take for example two individuals of two credit standings, where one individual is diligent in his monthly payments and the payments that he makes are much greater than the one paying the minimum monthly sum. The former would be paying a higher interest due to the assumed risk based on the ‘bad paymaster’. Steps can be taken to use the credit score to obtain a better interest. A credit report can be obtained at a nominal fee from the credit bureau, and a possible education or credit card loan facility would automatically request a report from the credit bureau and rank your credit rating to determine the interest to be offered. The interest savings here, from getting a good credit standing can be significant and may even offset the cost of the fee for a credit report.
Factors that affect your credit score
New credit is in reference to credit obtained in the past 24 months. Multiple inquiries on one’s credit report will lower their score. Although there are many valid reasons for multiple inquiries in one’s credit report. It is also known that when someone has a short credit history and few accounts, they will have a different score dependent on if they have recently been seeking credit. Opening several new credit accounts in a short period of time will lower your credit score. It is important to understand that this will also lower your score for having a lack of response to how long it has been since you’ve been using credit.
The length of time you have been using credit is important. If you have not been using credit for a long time, this does not necessarily mean you will have a low credit score. It just means it is difficult to accurately gauge a credit score. There are several factors to take into consideration. How long accounts have been established, by the type of accounts, and how long it has been since the accounts were used. A seasoned credit user should not have many new accounts considering it will look risky, and new accounts lower your average account age. A short credit history will require a few months to display and to raise your credit score.
Having credit accounts or owing money does not mean you’re a high credit risk. But there is an indication of credit risk if there is a high outstanding balance on a line of credit. It is important to manage the amount you owe, and it is okay to owe money while still being able to raise your credit score. It’s just knowing that you do not need to owe a lot. The ratio of what you owe to the amount of credit you have is also a consideration. The best way to improve your credit score in this area is by paying down your revolving credit. Owing the same amount but having fewer open accounts may lower your score.
Credit payment information has the largest impact on credit score. It is the most significant factor used by credit scoring systems to determine someone’s credit worthiness. Recent past due payments will lower your score. How much was paid and how often payments are made on time is weighed against late payments and amounts owed. An outstanding record of making timely payments will raise your credit score. A good payment history will stay with you for a long time.
Credit score is often the single most important document that affects your financial future. It serves as a reference point for any financial institution to gauge credit worthiness. Improvements or declines in your credit score will have a direct impact on your ability to take a loan. A high score will make you eligible for lower interest loans, whereas it’ll be harder to secure loans and receive higher interest rates with a low credit score. Therefore, it is essential to know what factors affect your credit scoring.
Managing Your Credit
The debt level on your credit account is the most influential factor in your credit score. Therefore, paying your bills on time is a crucial part of managing your credit. Always ensure that you meet at least the minimum payment for your credit cards and other loan bills. Consider setting up an automatic payment system from your bank to ensure that your bills are paid on time. Another way of managing your debt is to make at least double the minimum payment on your credit cards and other loan bills. By doing so, you are not only reducing your debt faster but also reducing the interest payments on your loans. In the event that you are unable to make a payment, contact your lenders immediately to notify them of your situation. In some cases, you may be able to negotiate a payment plan with your lenders until you are able to repay the remaining debt. Failure to make bill payments can have a significantly adverse effect on your credit score. Even one late payment can drop your credit score by 50 points, and if your payment becomes 90 days late, it may be reported to the credit bureau. This will remain on your credit report for 7 years and will massively decrease your ability to get loans, credit cards, and other credit applications. Another way of managing your credit is to avoid exceeding your credit card balance beyond what you can afford to pay off. It is very easy to spend beyond your means and carry a credit card balance from month to month. This will result in paying high amounts of interest on your credit card debt and will take a long time to repay the debt if only minimum payments are made. A good method of managing your credit card spending is to only use your credit card for purchases that you can afford to pay off by the end of the month. If you do carry a balance, you can check how this affects your credit score using online credit score simulators. In many cases, these provide advice on how to improve your credit score and how to optimize your debt to improve your credit rating.
Paying bills on time
One of the most important things you can do to improve your credit score is to pay your bills by the due date. It sounds simple, but it’s a very biggie because payment history has the largest impact on credit scores. If you are trying to improve your score, it’s important to keep your 0 balance accounts open. They help increase your available credit, which has a positive effect on your score. But paying on time is especially important if you are currently delinquent on any accounts. You will want to bring them current as soon as possible to prevent further damage to your credit. If you’re having trouble making on-time payments, it might be wise to contact your creditors to work out some sort of payment plan to get your accounts back on track. If an account is in danger of being sent to collections, be sure to do everything possible to prevent this from happening. A collections account can have a very negative effect on your credit, causing your score to drop significantly.
Keeping credit card balances low
One of the most effective ways to improve your credit score is to simply pay your credit card bills on time. This is often easier said than done. Many people rely on credit cards for all sorts of purchases. Other people have relied on credit cards to make ends meet during rough economic times. Many people have run credit card balances and have become victims of high interest rates and fees. Issue – High credit card balances. High credit card balances, even those below $5,000, can lower your credit score significantly. High balances indicate that you are overextended financially, and are more likely to make payments late or not at all. High credit card debt is an indicator of debit problems. This will weigh more heavily on your credit score than you might expect. If you have many credit card accounts with high balances you should prioritize paying them off. Credit card balance is the second most affecting credit score factor, weighted at 30%. Credit utilization is the comparison of your current credit card balance to your credit card limit. For example, if you have a $10,000 credit card limit and a $5,000 credit card balance, your credit utilization is 50%. This percentage is much too high. A good rule of thumb is to keep your credit utilization below 30%. High credit card balances greatly affect you in a negative manner when applying for a new loan or credit line. If possible, avoid using credit cards to make new purchases while paying off current balances. This also applies to personal loans. You might consider contacting your loan provider and consolidating your credit loans into one low-interest loan. This may save you money and increase your credit score.
Avoiding excessive credit applications
Many people do not realise that every time you apply for a loan, the moneylender makes an enquiry on your credit report to see if you are credit worthy. Each enquiry leaves a mark on your credit report. An enquiry can be a request for a copy of your credit report or a credit score. When you have too many enquiries on your credit report, it may chase away lenders because this behaviour is often associated with credit hungry consumers. Recent research suggests that new credit applications account for 10% of your credit score. I have often seen people apply for 3-4 credit cards at the same time because they wanted to get the new “sign up now and get a free gift” promotion. While there is nothing wrong with that, they soon realise that they had more credit cards than they originally intended to have. They then cancel the credit cards and this act can also affect credit scores. If you’ve had it for only a short while, that can be interpreted as having acquired credit recently. Of course, holding onto the card and using it over the long run would be the same as getting a new card. Cancelling credit cards is often a knee jerk reaction to get out of debt. However, you should always keep in mind that not using a credit card and cancelling one are two very different things. If you are concerned that you may use a credit card unwisely, keep it somewhere safe and out of sight, so as to not increase your balances. Credit cards with zero balances and a history of timely payments are actually good for your credit rating and can help you acquire a loan.
Building a Positive Credit History
Once you have obtained credit, you will need to use it responsibly. One way to do this is by setting a budget and only using the credit to purchase items for which you have budgeted. It is important not to overspend on credit because you may be unable to pay off the amount in the future, at which point interest will accumulate, leading to financial difficulties. A good practice is to set up a GIRO deduction from your bank account to pay the credit card bill in full each month. By doing this, you will avoid incurring late payment fees and interest. A common misconception is that one needs to incur some form of interest in order to build a credit history. This is not true; you can build a credit history simply by making several small purchases on the credit card and repaying the bill in full each month. Any form of credit, including credit cards, is likely to be reported to the Credit Bureau. This will reflect your credit payment pattern and provides a track record for lenders to assess your creditworthiness. An important point to note is that your credit score can be negatively affected if you are constantly seeking new forms of credit. Avoid applying for multiple credit cards or loan products in a short period of time. This can make you look desperate for credit, or it may look like you are in financial difficulty. Finally, it is important to have an emergency line of credit available. You may not need a loan when times are good, but it is difficult to obtain a loan when you are in financial distress. Having an available emergency loan can be a safety net and can be cheaper than other forms of credit.
3.2. Using credit responsibly
If you have no credit history, you will need to start building one in order to improve your credit score. An effective way to build a credit history is by applying for a credit card or small loan from the bank. If your applications are rejected, do not apply for multiple credit cards in quick succession. This can negatively affect your credit score. If you have difficulty getting a credit card, you may want to try securing a supplementary card on your parents’ credit card account, or you may try applying for a secured credit card.
Building a positive credit history is essential for improving your credit score. A positive credit history can be built by opening a credit card or loan account and using credit responsibly.
Opening a credit card or loan account
Measures for the credit card and loan usage are adequate, but be aware that overspending and easy access to credit can lead to financial problems. Only buy items that you can afford to pay in full and always pay more than the minimum sum on credit card debts. Always compare the rates and benefits of credit/loans to ensure that you get the best deal but do not make too many credit applications within a short period. High credit activity gives the impression of need or financial difficulties.
The most common way to borrow money is through credit cards. 71% of respondents have this type of debt, followed by 33% with cash on loans and 30% with education loans which also the highest percentage we have had since the inception of the survey. With the attraction of 0% interest balance transfers and on initial 6-12 month spending, credit cards are often considered a convenient and cost-effective way to borrow money.
Select “Free Credit Report” on the types of credit that you have in counting towards your credit history. You want a diverse credit mix, which means you should at least have a few installment type loans and a few “revolving credit” credit card accounts. A personal loan is an installment type loan with a set repayment schedule with a set term. This often confirms you paying a fixed sum over a specific period of time until the debt is repaid in full. A credit card allows you to carry a balance of debt and it is known as revolving credit.
Banks provide information about the great deals they offer on credit cards and personal loans. Both are useful tools in the establishment of your credit.
Using credit responsibly
The second way credit card usage can impact your credit worthiness is the trend in payments. It is important to consistently pay the minimum amount owing by the due date. Any missed payments, late payments, or consistently paying less than the minimum will be reflected on the credit report and can severely impact your credit score. In a worst-case scenario, it may result in the bank being forced to use the funds in your deposit accounts to pay off the credit card under the right of offset.
Credit bureaus look at your credit card usage in two ways. The first is to determine whether you have the capacity to take on more debt without being overextended. The credit report will show the maximum amount you can borrow on a particular card and whether the balance is close to the limit. This is referred to as the amount ‘utilization’. A high utilization relative to your credit limit can be a red flag for potential credit default, even if you pay the balance in full each month.
Credit cards are the most common credit facility in Singapore. People from all walks of life use them on a daily basis to make purchases, pay bills, withdraw cash, and transfer balances. If you use a credit card, it’s important to understand how it impacts your credit worthiness. Using credit cards responsibly can help you build a positive credit history, which is the best way to improve your credit score.
Diversifying your credit mix
It is also not wise to take all types of debt at the same time. The most common reason for an adverse change in financial health is a sudden increase in unsecured debt. An emergency situation, where there is a sudden increase in the debt but secured debt is unattainable, can leave one at a loss of future financial options and lower credit worthiness. So while diversification, there should be a clear understanding of what is the best type of debt for a given situation and the planned future moves. We can say that debt is a reflection of how a person is managing his current and future resources for an improved quality of life.”
“What at the first look seems to be a rather contradictory advice in the above explanation is actually a sound long-term strategy. If you think about it, it is a well-known fact that people take education loans to improve their competency and thus earning capacity. This in turn can lead to a better quality of life, reflected in the society’s status. Various behavioral patterns and lifestyle decisions are driven by this change in status. As a result, if someone were to simply maintain the same level of credit card debts and car loans, he would appear to be missing his payment or having financial difficulties. His ability to service the same debt also comes into question. As such, 10 years from now, he is spending more money on interest payments to be in the same position as someone without the change in status. If this person had planned for the future, by periodically shifting his refinancible debt to match his level of comfort/quality of life, he would find that he has an overall better financial health and lesser debt levels. The whole idea is to align the type of debt with a person’s lifestyle and curve on EMI or interest rate should be as low as possible.
Monitoring and Repairing Your Credit
Regularly checking your credit report is important. Most people do not know what is contained in their credit report. The fact is that very few Singaporeans know what their credit reports contain. The report lists out the credit facilities that you have and your payment history over the past 12 months, as well as any late payments. It also indicates if your credit facilities have been “restructured” and if you have filed for bankruptcy or if any legal proceedings have been taken against you. A credit report also contains information on enquiries made on a consumer over the past 24 months. Essentially, it contains a detailed record of your credit payment history and is an important tool used by credit providers to decide on your credit application. It is therefore important to check your credit report regularly to ensure that all the information contained within is accurate and that there are no discrepancies. Any errors on your credit report could affect the outcome of any credit application. You should check your credit report when you are planning to make a large credit application, for example, a home loan. At least once a year, you should check your credit report to ensure that all the information contained within is current and accurate.
Regularly checking your credit report
There has been a case where a credit report is checked and showed a score of 435. The person applied for a housing loan and was denied. Few years ago, a main reason of denial is because the prospective borrower is a non-permanent resident. However, implementation of TDSR, or Total Debt Servicing Ratio framework on 29 June 2013 has made it a prevalent reason of denial, especially the borrower has too many debts. The person checked at his credit report again and found that there are some standing instructions on his personal loans and credit cards to deduct more than 50% of his salary, a breach of MAS regulations. This resulted in a lower credit score and the denial of the housing loan. This is a clear example of how a low credit score may affect your loan application and how a credit report reflects your financial situation. There are several credit bureaus that provide a credit report. The most commonly used is CCRIS for the credit reports for loans, and CTOS for comprehensive reports including PTPTN, TM, credit cards, bankruptcy, and legal cases. You are entitled to a free credit report once every year inclusive of a credit score. Additional reports requested within the same year will not include a credit score. A credit score is in numeric form typically between 300 and 850, reflecting the likelihood of a person’s ability and willingness to repay debts. A higher score indicates lower risk, hence increasing the probability of a successful loan application with lower interest rates.
Correcting errors on your credit report
Take the initiative to correct any errors on your credit report with the respective institutions. It can be as simple as a wrong entry. For example, OCBC could have reported that you have 3 credit cards with them when you only have 2. Some documentation of the facts with the respective institution and credit bureau can help to sort out the matter. In this case, OCBC would only need to issue a letter to the credit bureau to clear up the error. Always follow up any verbal dispute with a written one and include copies of any documentation that you have supporting your position. Be sure to send them by registered mail and request a returned receipt to ensure that your correspondence has been received. Always keep a file of your correspondence. For more complex cases, such as errors concerning your payment history, it would be easier to deal with the credit bureau. Along with providing them with documentation to support your case, it would be beneficial to get in touch with the credit issuer and try to rectify the matter from that end. Do keep a record of all correspondence and contact with the credit issuer, in the event that the matter takes a long time to resolve, you do not want the adverse entry to reappear on your credit report. If the credit issuer agrees that an error has been made, they are obliged to inform the credit bureau to rectify your credit report. Note that credit bureaus are required to investigate and deal with any errors within 30 days.
Seeking professional help if needed
The Credit Bureau seems to provide a comprehensive range of credit repair services (in this context, “repair” refers to the act of improving and taking corrective measures towards an individual’s credit health, and not literal repair services to damaged items). They range from self-help “Do-It-Yourself” credit repair kits for individuals who prefer to tackle the errors on their credit reports on their own, to more hands-off approaches such as engaging a Credit Repair Specialist to help effect the necessary corrections (Citibank is also offering a similar service to Singapore residents who have credit data with them). The credit repair specialist, however, will take the process one step further. Credit repair specialists will provide a service that many find invaluable to the busy Singaporean – an in-depth analysis of the credit report, highlighting potential problem areas that the individual may not be aware of. This is a useful service for individuals who do not have the time to sift through their credit reports line-by-line. After working in coordination with the client to prioritize the items to be corrected, the credit repair specialist will act on the client’s behalf to follow up with the creditors and the Credit Bureau, using their expertise to increase the probability of successful dispute. While the convenience of credit repair specialists is indeed attractive, it is important to be wary of the unscrupulous. Be sure to research the company or individual thoroughly, and be wary of promises of “credit repair” as opposed to offerings of the aforementioned credit correction services. In recent years, the Singapore government has taken steps to improve regulation of the credit industry, and consultation fees are becoming more competitive. Prices for credit repair services will vary, and it may be necessary to obtain several consultations before finding a service that is value-for-money.