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Credit Score

CR-Money-Hero-How-to-fix-your-credit-score-06-16.jpegWhen you start working you become in charge of your finances. You have the freedom to spend on things you decide on whether it’s a basic need or a luxury. You also learn to become responsible for things you spend on. 

Earning a living not only gives you freedom, but you enter a whole different world. It’s because you now gain access to things that are only available for people who are working, now that you have a money to pay - such as loans and getting a credit card.

Most Filipino start applying for loans and credit card when they get a job. If you’re one of the people wondering why you can’t get a loan or a credit, even though your requirements are complete, it might me because you’re lacking in some of the deciding factors.

While most people don’t know about credit score - this is one of the things that determine our chances of approval. If you’re not familiar with credit score, GoBear is here to help you take a look at credit score and how it affects when you apply for a loan or credit.

Before we go through the credit score, we need to understand first what is a credit history and a credit report.

What is a Credit History and Credit Report?

There are differences within a credit history and a credit report. The credit history refers to your credit usage over the years. This includes your debt payment information such as the schedule, the amount and so on.

Your credit history is a record of your debt payment. This shows your responsibility and ability to pay for the loan you made. Lenders can obtain your credit history information from various financial institutions, banks, collection agents, the government and so on.

The credit history becomes a credit report – this essentially contains a record or summary of your financial activities and credit worthiness and loan eligibility. This report is compiled by a certain agency whose information is then used.

While we still rely on the external or internal database for this information, the country’s centralized credit information system is expected to go live by January 2018.

What is included in a credit report?

There are different agencies that handle your credit report, and each holds a slightly different information about you.

Here is some general information that is included in your credit report:
· Your Personal Information (Name, Address Date of Birth)
· Your late/missed payments or defaults
· How much money you owe to lenders
· Financial links to other people (joint bank account)
· Any County Court Judgments (CCJs) against you
· If you have been declared bankrupt

This information might be asked when you apply for a loan or contract, then they may choose to use this piece of information in assessing you.

What is a Credit Score?

For you to have a credit score - you should have a credit history - an account of how you’ve used your credit over the past years that shows your responsibility in paying your debts. A credit report is then derived from your credit history.

A credit report is a detailed list of information compiled by banks and lenders that include your payment history, payment totals, and payment frequency. Your credit score is an information created from your credit report. Since there’s no centralized credit reporting yet in the Philippines, TransUnion was one of the largest credit reporting agencies.

A credit score is a numerical representation of your borrowing history consisting three numbers that help you determine your creditworthiness.

If you have a low credit score, it means you have unsettled debts, payment delinquencies and other activities that show you might not be qualified to handle a new debt. While a high credit score means, you are responsible for paying off your loans on time, and you don’t have any delinquent payments.  

In the U.S. credit scores are scaled from 300 to 850. A credit score of 700 and higher is generally considered good, while there is yet centralized way of knowing your credit score in the Philippines.

Your credit score can be different between lenders or even between different products from the same lender, depending on the criteria used in determining you as a potential customer.

Lenders typically use your 3-digit credit score to help them decide whether you’re qualified for a credit or personal loan. In general, the higher score you have, the higher your chances of getting approved.

The information included on your credit report and your credit application might be used to determine as a deciding factor on the following:

- Whether to lend to you

- How much to lend you

- How much interest to charge you

The latest information on your file will have the most impact, this is where your lenders are interested the most - in your current financial situation.

Your interest rate will depend on your credit history and financial situation, for instance, you have missed payments. Lenders believe that there might be taking a risk when lending to you so they will charge you with higher interest and this will affect your eligibility to some loans.

Your credit history can also affect your ability to get the perks of having an insurance or begin mobile phone contacts

If you already have a credit history, it’s best to check it regularly as it can help you spot any fraudulent activity or mistakes on your credit report.

How is credit score determined?

Lenders or banks in the Philippines have their own standard for rating credit scores. These are usually drawn from the credit history of the applicant.

Before there was one of the largest credit reporting agency in the Philippines – TransUnion which partnered with BPI, Banco de Oro, Metrobank, HSBC, and Citibank

Philippines will soon have their centralized credit information system, the Credit Information Corporation (CIC) which is expected to go live by January next year.

Although the CIC or even Fair Isaac, the company behind the FICO score do not reveal how exactly credit scores are computed, here are how the bureaus might have calculated it: 

· 35% payment history – The payment history shows all the payment you have transacted with the company whether it is a missed payment or you have been paying on time.

· 15% length of borrowing history – Borrowing history is about the time frame of how long you’re going to pay for your loan.

· 30% amount owed – This is one of the deciding factors if you are likely to pay for your loans or not. The amount owed shows the balance you still owe from your credit card company. For instance, people who maxed out their credit cards are most likely to fail from paying their loans compared to those who borrowed money within reasonable limits.

· 10% new credit – The number and frequency of new accounts will create an impression.

· 10% types of credits used – Lenders checks whether you have multiple accounts like a credit card, home loan, personal loan or business loan.

Lenders use credit scoring in risk-based pricing in which the things mentioned above are based on the probability of repayment. In short, the better credit score you have, the better the rate offered to you by the lender.

*Note that this is merely what bureaus think financial institutions compute their credit score since there is no centralized credit scoring in the Philippines yet and the credit card companies and other financial institution uses different calculation tools to determine the credit score of a person. 

Why credit scores are important

Credit scores are decision-making tools that lenders use to help them determine your likeliness to pay on time. Credit scores are also sometimes called risk scores because with the help of the credit scores, lenders can assess the risk you pose that you can’t repay the loan as agreed.

Having a good credit score is important as it determines whether you’ll be eligible for a loan or not. Depending on the interest rate of the loan you qualify for, it could mean the difference between hundreds and thousands of pesos. A good credit score could also mean that you are able to rent and have the mobile service that you need.

The Philippines consists of 25% of financially literate people, and there aren’t many Filipinos that are conscious of their credit history that’s why the CIC has developed a credit history database which depicts the basics for the Filipino’s credit scores.

Filipinos should be aware and be more conscious of their credit behaviour. While many people are not aware of the credit scores, credit scores are like report cards that you might review at the end of the school term, but instead of numbers, it presents the activity within a scoring range. Although it’s not seen in your credit history, rather a credit score is generated each time a lender requests for one. Depending and according to the to the credit scoring model of their choice.

Every time you set a major financial goal, like travelling or buying a new car, your credit score is likely part of that financing picture. Since credit scores are a basis of your borrowing activity, your credit score will help lenders determine whether you qualify for a loan or how good the loan terms will be.

However, credit scores are not the only thing lenders look out whenever you’re applying for a loan or you want to extend your credit. Your credit report also contains details which could be taken into consideration, such as the total amount of debt you have, the types of credit you have in your report, and any derogatory marks you have. Lenders also look at your total expenses against your monthly income, (also known as your debt-to-debt ratio), depending on the type of loan you’re looking for.

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How do credit scores affect us?

Understanding how your credit score affects us is important. This can help you a lot when you have decided to apply for a credit or a loan or even land a good job.

While the information that affects a credit score varies depending on the scoring model used, but with a poor credit it can definitely affect us in the following instances:

Your monthly utility bills

Electricity, telephone, cable and other utility companies tend to check their customer’s credit profile. For instance, your phone company might be disconnected one day – this is because your phone company has reduced your credit limit.

Interest rate that goes with your loan

people usually tend to get a credit card to establish a good credit score so they can get a loan. If you have a bad credit score or profile, lenders may consider you as a high risk, shall you be qualified for a loan, don’t expect that you can get the lowest interest rate.

The type of phone you are going to use

If you are looking for a mobile service or apply for a mobile service, telephone service company determines if you deserve a higher plan package or not. You might plan on getting a high-end phone but end up getting a mid-tier phone instead. Worst case scenario is your mobile service application never gets approve

Your job search

Employers are now setting the bars higher and do credit checks during the hiring process. Financial responsibility reflects your personality. No employer wants a someone who is a financial delinquent and irresponsible with his debts.

What is a good credit score

Your credit score is an important aspect of your financial profile. While lenders have their own standard and method of checking your credit score, there still a thing that makes it a good credit score. If you have a good credit with one reporting agency, it’s highly likely that you will have a good credit score from your lender.

A credit score ranges between 300-850 in the U.S. If you have a credit score of 700 or above, then you already have a good credit score. A score of 800 and above in the same range is excellent while most scores are ranging from 600 to 750.

With the centralized national credit bureau in the Philippines running soon, banks and financial institutions will be able to adjust interest rates based on the borrower’s credit history.

But keep in mind that having a good credit score doesn’t guarantee that you will be approved for credit or offered the lowest interest rates. These are just guidelines.

Different lenders might have different standards for what is a good or excellent score, especially in the Philippines. But the better your credit is, the more you’ll save and the less rejection you’ll face.

What information is not considered by your credit score?

There is Your credit score does not consider the following information:

·  Your race, color, religion, national origin, sex, or marital status.

· Your age

· Your income, job, title, employer, the date you were hired or employment history (however your lender may consider this information in making a decision for their overall approval)

· Your address

What causes a bad credit score?

Since our credit score is important and it determines how much credit lenders are willing to give you. Knowing what causes your credit score to have a poor rating can help you stay away from the pitfalls that can take years to fix.

The following key elements are what reasons why people get a poor rating on their credit score:

When you pay late

This is one of the reasons most Filipinos have bad credit score. If you are usually making late or missed payments, then expect that your credit score will decrease. You might want to consider paying on time since thirty-five percent of your credit score is your payment history.   

When you DON’T pay at all

What’s worse than paying late? Completely ignoring your credit card bills. When you have an unpaid credit payment each month, you’re becoming one month closer to having your account charged off.

When you have an account having charged off

One of the worst thing that can happen to your account status for your credit score is when your creditor stops thinking you’re going to pay for your credit card bills. When this happens, they will charge off your account.

When your account is sent to collections

This happens when a creditor gives up trying to get paid for you so they hire a third-party to try and collect the payment for you. The creditors may send your account to collections before or after charging it off.

When you’re defaulting on a loan

Similar to credit card charged off, a loan default shows that you have not fulfilled your end of the loan contract.

When you are having your home foreclosed

Are you getting behind your mortgage payments? This can lead to foreclosing your home. In turn, the late payments you make will only ruin your credit score and make it harder to get approved for future mortgages.

When you are filing bankruptcy

This is one of the most harmful for your credit score and this can devastate it as well. While this can be the last option you can have, it’s also a good idea to seek alternatives. For instance, you can have a consumer credit counseling.

When you’re getting a judgment

Creditors look at judgments as it shows you not only avoided your bills but also got the court involved just to make you pay for your debt. While both can be bad for your credit score, having a paid judgment is better compared to an unpaid one.

When you maxed out your credit cards

Most Filipinos tend to max out their credit cards or go over-the-limit. Since doing these make your credit card utilization 100%, this is not healthy for your credit score.

When you have high credit card balances

Having a high credit card balance makes your level of debt high. This is measured by credit utilization. While it increases your credit utilization, this decreases your credit score.

When you close credit cards that have credit balance

The longer credit history you have, the better credit score you may have. Another factor of your credit score, which data is drawn from your credit history. When you close cards with credit balance – especially the old ones, this make your credit history shorter than what it really is.

Knowing these actions that could hurt your credit score can help you avoid getting a bad rating. Whether you’re a new credit owner or you already have a credit card, this can greatly benefit you in building a great credit history, thus having a greater credit score.

How long will it take to improve my credit score?

Have a bad credit score? When you have realized you’ve done some of the things mentioned above to get a poor rating, you might want to start improving your credit score.

In general, credit history is established up slowly over time as you make more on-time payment. While you increase your number of on-time payment and make a good impact on your credit score, the same thing applies for when you take a longer to pay your bill.

Letting your bill go unpaid can greatly affect your credit score. Keep an eye out on your credit score to help notice some issues.

If you have a negative mark on file such as late payments, it will remain for at least six years. So, make sure you don’t pay late.

However, there are tricks to mend a bad rating in the next section, that you can start doing to begin raising your credit rating.

How can I improve my credit score?

Having a low credit rating can be a bummer, but rest assured that there are plenty of things you can do to start improving your score today:

Start establishing a great credit history early

Most people get a credit card so they can start building their credit history and reassure banks that they are a good credit risk. Having a good credit history lets you apply for a home loan or a car loan. However, you have used it responsibly and pay it off every month.

Check your files for mistakes

If you have a wrong information on your file even if it’s just a slightly wrong address, it can have an impact on your score. Be sure to check all the details you have provided and report any incorrect information immediately.

Pay your bills on time

Make a good impression by making a purchase with your credit card that you can pay off on time. This shows that you are capable of managing your finances effectively.

Avoid late payments

Think it’s easy? Not really. There will be times when you will not be able to make it in time to pay your monthly dues – may it be financial incapacity, emergencies, or even just forgetting to pay altogether. Make it a habit by paying your credit balance early, or better yet, pay it twice in a month.

Missed payments? Get back on track

When you’re busy with things, sometimes we can’t avoid missing payments. But catch up as soon as you can, that way you can avoid getting a low credit rating. Make sure your overdue accounts don’t exceed 30 days, your creditor may interpret it as an unintentionally missed payment, or you forgot the due date or you did not receive the billing statement on time.  This means your credit history will remain good.

Keep your debts low

Your credit card is not unlimited, having a lot of revolving debt is bad on your credit history. It’s better to lower your debts. It’s recommended in the US to keep your debt-to-credit ratio at 30%. For instance, your limit is P25,000, your balance should be P7500 or less.

If you have an outstanding debt, you must remove it before applying for a new credit card. As financial institutions and credit card companies may be hesitant about lending you more if you have a large debt owned.

Check for fraudulent activity

In most cases, it’s common in the Philippines to have fraudulent activity so regularly checking your file for any fraudulent activity can be helpful. If you see something incorrect or doesn’t apply to you – for instance, someone applied for a credit card under your name without your consent, contact the credit reference agency as soon as possible to have your file updated.

Don’t exceed your limit

Having a credit balance higher than your existing credit limit is a red flag for most banks and can give you a bad rating. This balance usually includes interest payments, it’s best to opt by converting large transactions to installments.

Ask for a raise in your credit limit

Can’t pay off your total debt? Then ask your credit card company to increase your credit limit. Credit reports are based on percentages, so the higher credit limit you have, the lower credit utilization you will get if your expenses remain in the same range.

Let’s say your credit limit increased to P50,000 from P25,000. Your balance will be 18,000. It’s a huge improvement that will improve your credit score. Keep in mind that banks increase your limit if you’re a delinquent or going over your credit limit.

What if you don’t have a credit history?

We’ve gone through everything about credit score, but what if you don’t have a credit history? Don’t worry, you didn’t do anything wrong. Here are reasons why you may not have one:

· You don’t have a credit card

· You have never taken a loan

· You’ve only been using your credit card for a couple of months

This usually happens to young adults who haven’t established their credit histories. It can also happen if all your credit account is inactive for a long time.

How to establish your credit score?

To establish your credit score, you will need to have a credit card. Here are some options you can use for getting a credit card when it’s your first time.

· Look for a bank company to apply for a credit card

· Find a student credit if you’re a student

· Get a joined credit card with one of your family

Once you’ve opened your credit card account, you will be able to see your score if you continue using it for more than 6 months.

Your credit score has a significant impact on your financial activities and will affect your ability to apply for loans and credit cards. While this may sound like a huge responsibility, following the steps of maintaining a good credit history and credit report is a walk in the park.

Be sure to manage your credit wisely today by choosing the right credit card for you. Compare with GoBear today!

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