Understand Your Credit Ratings

If you’ve ever been to the bank to inquire for a loan, chances are you’ve heard the team ‘credit rating’ or ‘credit score’ more than a handful of times. But even if you’ve heard it before, do you know what it means?

To put it simply, a credit rating or score is a quantitative measure of how credible a person is with regard to his history of financial transactions. According to the Credit Bureau of Singapore, credit scores are generated based on your recent credit, account delinquency data, credit account history, available credit and enquiry activity. However, the specifics behind the weightage of these factors is confidential, hence it is important to maintain a good record in all of those areas if you want to have a good credit score.

Importance of a good credit score.

Having a good credit score opens up more possibilities in your life than you might think.

A good credit score can help you to afford a house.
The majority of people will want to settle down at some point in their lives. You’ll want to build your own family, get married, get a house you can call your own, and maybe even have kids. Imagine sending in an application for a housing loan one day, only to receive a call informing you that your loan application has been rejected. How would you feel? You might be thinking: Never mind, I’ll just rent a house instead. Little do you know, even renting a home requires a credit check. With poor credit, a larger deposit may be requested of you. In the worst case scenario, you may not even be allowed to rent the house. Having a good credit will give you more leeway your choices of a place to live.

A good credit score can help you to afford a car.
While it’s true that Singapore is a small country where you can practically get anywhere using just public transport, who wouldn’t want a car if they could afford it? The amount of money you need in order to buy a car is much less than the amount you’ll need for a house, hence car loans typically have a higher approval rate. However, with a poorer credit score, it is likely that you will only be qualified for loans with much higher interest rates and a larger down payment. Insurance companies will also take your credit score into consideration when calculating the insurance premium you need to pay. You will ultimately end up paying thousands more than someone with a good credit rating would have needed to.

A good credit score can help you to start your own business.
Unless you’re rich, you’ll probably need to apply for a business loan if you ever decide to start your own business. After submitting an application to the bank or money lender, your credit records will be looked into and considered before they decide whether or not to approve your application. Being unable to access business loans also limits the rate at which you can expand your business, since you lack the funds to hire more and better qualified personnel and upgrade your equipment.

A good credit score can help you to get a job.
Nowadays, many employers have adopted the practice of doing credit checks on prospective employees before deciding whether or not to hire them. Naturally, having a bad credit score could possibly dissuade them from hiring you.

A good credit score guarantees you lower interest rates.
Financial institutions offset the risk of loaning to customers with poor credit by increasing the interest rates of their loans. Having a good credit score will allow you to obtain loan easier and with lower interest rates, which will save you a considerable sum of money in the long run.  


How to improve your credit rating.

Although licensed money lenders are relatively more flexible about your credit score than banks, it is still preferable for you to try and improve your credit rating. In the event that you need another loan in future, more options will be available to you if you have good credit, likely with lower interest rates and more flexible repayment options as well. Here is a list of habits you can adopt to help you make that dream of having a good credit score a reality.

  1. Check, check and check your credit reports.
    No system is perfect. You need to be responsible for your own records, because no one will know it as well as you do. Check your credit report at least once a year through the Credit Bureau Singapore (CBS). Ensure that there are no errors that are causing your credit rating to be worse than it actually is. If there are any, be sure to contact CBS as soon as possible so they can look into it for you.
  1. Pay your bills consistently and punctually.
    Financial establishments judge an individual’s credibility by the way purchases are charged to their card and how they pay off their debts at the end of every month. Missing payments will put a hefty dent in your credibility as a borrower and cause your credit rating to deteriorate. Contrarily, consistently paying your balances at the end of every every month will help you to gradually improve your credit rating from ‘bad’ to ‘fair’, and eventually to ‘good’. It also helps you to avoid the 24% charged for outstanding balances at the end of every year.

  2. Use your credit consistently.
    Watching a kid eating chocolate day in day out doesn’t give you any insight about how whether or not he likes sweets, because you’ve never seen him eat it nor shun it. Similarly, if you don’t use your credit consistently, banks will not have enough data on your credit usage to judge your credibility. But won’t using credit increase your debt and subsequently lower your credit rating if you’re unable to pay your bills? Yes, that can happen if your spending gets out of hand, so the key here is to make sure you spend in moderation.
  1. Cancel any unused credit cards you may have.
    The number of credit accounts you have can influence your credit score. Having too many credit cards may give your lender the impression that you are overextending yourself, and your loan application will be rejected as a result. Have only as many cards as you need, nothing more, nothing less. Be sure to contact your provider directly to request for your account to be closed – simply cutting up and throwing away your cards will not do anything to your account.

The key to having a good credit score is consistency. According to the Credit Bureau Singapore, your credit score is calculated based on the past 12 months of your repayment history. If you fully dedicate yourself to your cause and are persistent in your efforts, your credit score is bound to improve, perhaps slowly, but surely.