The Ultimate Guide to Credit ScoresEverything you should know about credit score.
When you start working you become in charge of your finances. You gain the freedom to spend on things you decide on whether they're basic needs or luxuries. You also learn to become responsible for how you spend your hard-earned money.
Earning a living not only gives you freedom; it introduces you to a whole new world. You now have the spending power to get the things that used to be out of your reach, now that you have money to spend and access to non-monetary means, like personal loans and credit cards.
Most Filipinos start applying for loans and credit cards when they get a job. If you’re one of the people wondering why you can’t get a loan or a line of credit even though your requirements are complete, it might me because you’re lacking in some of the deciding factors.
Credit scores are not an oft-discussed topic, but it's one of the things that determine your chances of getting approved for a loan or credit card. If you’re not familiar with credit scores, we at GoBear will help you learn how it affects your application for a multitude of financial services.
Before we discuss credit scores, we need to understand first what a credit history and a credit report are.
What's the difference between 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 interest charges.
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, and the government.
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
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 the following:
- Whether or not to lend to you money
- 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: 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. The 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, does not reveal exactly how credit scores are computed, we've provided the factors used in calculating them:
- Payment history: This shows all payments made with a financial company; it also indicates whether you've been paying on time or not.
- Length of borrowing history: This provides a time frame of how long you’ve been paying for your loan.
- Amount owed: This is one of the deciding factors for approval because it determines 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. People who've maxed out their credit cards are most likely to default on their payments as compared to those who borrowed an amount within reasonable limits.
- New credit: The number and frequency of new accounts will creates an impression, which financial companies use to help determine your eligibility.
- Types of credit used: Lenders check 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 your credit score, the better the rate offered to you by the lender.
At the moment, there is no centralized credit scoring system in the Philippines. Credit card companies and other financial institutions use different calculation tools to determine a person's credit score.
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 traveling 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.
How do credit scores affect you?
Understanding how your credit score affects you is important. This information can help you when you decide to apply for a credit or loan. While the factors that affect your credit score vary depending on the scoring model used, poor credit can definitely affect you, especially in the following aspects.
Your monthly utility bills
Electricity, telephone, cable, and other utility companies tend to check their customer’s credit profile. For instance, your phone might be disconnected one day because your phone company has reduced your credit limit.
Interest rate on your loan
People 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 mobile service or have applied for one, the telephone 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 in your credit score?
Your credit score does not consider the following information:
- Your race, color, religion, nationality, sex, and marital status
- Your age
- Your income, job title, employer, and employment history (however, some financial institutions may consider this information in making a decision for their overall approval)
- Your home and business 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 reasons contribute to people getting 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 written off
One of the worst things that can happen to your account status is when a creditor determines that you have no intention of paying your credit card bills. When this happens, they will write off your account.
When your account is sent to a collections agency
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 default 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 have 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 file for 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 get a judgment from a court of law
Creditors look at judgments as it shows that you avoided paying your bills to the point that the court was involved. While this is bad for your credit score, settling your account even after a judgment's made is still better than leaving your debt unpaid.
When you max out your credit cards
Most Filipinos tend to max out their credit cards or go over-the-limit. Since doing this makes 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. While this increases your credit utilization, it also decreases your credit score.
When you close credit cards with remaining balances
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 that the situations above can hurt your credit score will 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 flawless credit history—and an excellent credit score.
How long will it take to improve my credit score?
Generally, credit history is built up slowly as you continue paying on time and avoiding the scenarios mentioned above.Letting bills go unpaid for longer periods can greatly affect your credit score so keep an eye out on these things and make adjustments where necessary.
If you have negative marks on file, it will remain for at least six years. So make sure you keep on top of your finances to avoid getting a bad credit score. However, there are tricks to "mend" a bad rating, and they're so simple that you can start doing them now.
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 wrong information
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
There will be times when you will not be able to make it in time to pay your monthly dues—be it 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.
Avoid missed payments
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 manageable
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 your accounts 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.
Never exceed your credit 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 scores, but what if you don’t have a credit history? Don’t worry, you didn’t do anything wrong. This usually happens to young adults who haven’t established their credit histories. It can also happen if your accounts have been inactive for a long time.
Below are some of the reasons why you may not have a credit score.
- 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
How do you establish your credit score?
To establish your credit score, you will need to, at least, have a credit card. Here are a few tips on getting a credit card for first-timers.
- Look for credit cards with easy approval
- Find a student credit if you’re a student
- Get a joint or supplementary credit card if you can't get your own
Once you’ve opened a credit card account, you will start building your credit score after 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!