At a glance...
Your credit score plays an essential role in your financial health. A bad credit score can make acquiring personal loans and credit cards difficult or impossible. But what is a credit score? How do you find your score, and how do you improve it? We know you’ve got many questions, and we’re here to break them down for you.
What’s a credit score?
A credit score tells financial institutions how likely you are to repay debts or default on payment. The Credit Bureau reports details from your credit history to different institutions. Your credit score in Singapore is called “credit grade.”
In Singapore, two leading institutions provide ratings: the Credit Bureau Singapore (CBS) and the Moneylenders Credit Bureau (MLCB). Banks and other finance-based companies receive scores from the CBS, while moneylenders default to the MLCB.
What effects your credit score?
Several factors impact your credit score, and it’s essential to know so you can plan to improve each area.
1. Utilisation Pattern
Utilisation pattern tracks how often you spend money. If there’s a drastic shift in how much you are spending, such as taking several loans out in a short time, this may be concerning to banks and affect your credit score, making institutions less likely to approve your next loan or credit application.
2. Recent Credit
Another action that can cause your score to drop is applying for several credit facilities in a short time. Credit Bureaus consider your recent account activity when determining your credit score. If you want to apply for new bank promotions such as cashback, you might want to spread the promotions throughout the year. If they see you applying for several promotions at once, they may think you’re overextending yourself.
3. Account Delinquency Data
Account delinquency data refers to how reliable of a customer you are. If you have missed your payment due dates for your credit card or made late partial payments, this can affect your credit score. These actions indicate delinquency behaviour by the Credit Bureau, which favours reliable payers.
4. Credit Account History
Another factor in your credit score is how long you’ve had a line of credit open or how long you’ve been a customer with one particular bank. The Credit Bureau looks at your history to determine whether you are a responsible borrower. If you have a long history of making payments on time, this will drastically increase your credit score.
5. Available Credit
The Credit Bureau also considers how much available credit you are allocated and how many credit cards you have from various sources. Limiting the number of credit cards you have is best to improve your credit score.
6. Inquiry Activity
Although this does not significantly affect your score, it is still important to note that a high volume of credit inquiry activity will lower your credit score. Financial institutions inquire about your credit score when you apply for a fast cash loan or credit card so keep credit inquiries to a minimum on an as-need basis
How does bad credit affect you?
If you want to borrow money, a bad credit score will make that difficult. The lower your score is, the less money you can borrow. You may even have trouble getting a credit card with a low credit score.
A bad credit score can also affect your HDB loan application, especially if you’re not a full-time employee with regular CPF contributions. Nowadays, even employers are asking to see your credit score, especially if you plan to enter the finance industry.
To set yourself up for the future, you need to prove that you are responsible with money by building your credit score to a healthy place.
How can you improve your credit score?
If you currently have bad credit, don’t fret! There are ways in which you can improve your score in a year or less. The good news is if you go an entire year with on-time payments, the Credit Bureau Singapore will essentially “erase” a bad credit history.
Keep reading below for our top five tips on improving your credit score.
1. Repay Loans On Time
It is vital to always make on-time payments if you want your credit score to improve. You must make payment before you receive a letter reminding you of the late payment. Your credit score will drop by the time you receive a second letter.
Regarding credit cards, paying off your balance in full each month is best, especially if you want to save on interest. If you can’t repay the entire amount, at least pay the minimum required payment for each billing cycle.
If, for any reason, you think you may miss a payment, inform your lender beforehand. They may be able to help with an alternative option to minimize the impact on your credit score.
2. Never Default On Payments
When you default on a payment, it will forever show up on your credit history. Defaulting is the most detrimental action you can do for your credit health. Even just one default can make getting a credit card, personal loan, or home loan difficult.
If you cannot meet the repayment requirement, always seek credit counselling and choose to restructure your debt. Also, remember that if you default on a payment but have the funds available to pay it, you can find yourself in a world of legal trouble.
3. Limit Your Credit Facilities
It is easy to miss a payment if you have too many credit facilities and different billing cycles. To prevent mistakes, you should limit the number of open credit facilities you have at any given time. A good number would be to keep your credit facilities under five. It’s good practice to close credit cards you no longer use, which will also save you on annual fees. When it comes to a personal line of credit, usually, one is sufficient. If you decide to switch to another credit card for better benefits, remember to close out your old one.
4. Avoid Applying For Excessive Accounts
To manage your finances to the best of your ability, you should limit applying for excessive accounts. Having too many credit card accounts can be challenging to keep track of. Instead, limit your liability, making it easier to maintain your credit score.
5. Avoid Applying For Multiple Loans Within A Short Period
Doing anything related to credit in excess in a short period will damage your credit score, especially when taking out multiple loans. Doing so will signal to the Credit Bureau that you are going through financial hardship. You’ll want to spread out any loan applications to remain in good standing.
If you need to borrow more money, wait one month before applying for a new credit card. Remember, using a personal loan comparison tools will help you find the best offer without actually applying for another loan.