How to maintain and improve your credit score
A good credit score is important, to give you access to vital loans such as home loans, and education loans.
Getting to that stage, however, will take some self-discipline and know-how. It’s not just a matter of improving your credit score to unlock more financial options - it’s also equally essential for you to maintain the good credit score you’ve accumulated through hard work.
The question is - how do you get to that stage and maintain it once you’ve attained a good credit score? Here are some simple tips to get you started.
Always pay your credit card bills on time
This is the single biggest factor in improving your credit score. A good track record with your payment will keep your credit score healthy, not to mention it puts you in good standing with the banks too.
But whatever you do, don’t wait until you get a reminder letter before you pay your bills. By then, your credit score has already been affected.
Assuming you’ve already chalked up some bad credit, does it mean the end of the world? Far from it. In fact, you should do whatever you can to pay off the outstanding amount. If you are running low on cash liquidity, you can take on a small loan (at least $1,000), and then automate the loan repayments, such as via bank GIRO.
As you keep making repayments on time, your credit score will start to improve. You may lose some money due to the interest repayments, but it’s the quickest way to rebuild your credit score. Needless to say, while you are paying off your outstanding credit card bill, you should also repay the loan as quickly as you can. Of course, the ideal solution is to always have some spare cash to pay off everything, especially when you are about to make a major loan application in the next 12 months (e.g. home loan or education loan).
Minimise your credit accounts
Be tidy with your use of credit. If there’s a line of credit or a credit card that you haven’t used in years, then pay it off and close it. Besides, closing unused accounts also means you will avoid annual fees that you need to pay to keep such accounts open.
Try not to have more than five credit accounts. Three credit cards and a line of credit is reasonable; but 11 credit cards and four credit lines would be excessive.
If you make a balance transfer, close the previous credit account that you’re paying off. So if you use a balance transfer to pay credit card A with credit card B, then cancel credit card A right after it’s paid off.
Read more: Credit score 101
Don’t leave loose ends.
Having too many credit accounts makes you look “credit hungry”. This behaviour is interpreted as a warning sign, because people facing a financial crisis (e.g. retrenchment, or a failing personal business) often open multiple credit accounts in a short time.
Limit simultaneous loan requests to banks
Whenever you send a loan application, a credit enquiry is logged (i.e. the bank contacts the Credit Bureau of Singapore, CBS, for the information). Having too many enquiries in a short time will lower your credit score, as it suggests you’re credit hungry.
Space out your loan applications – approach two or three borrowers at a time, rather than sending out 20 credit applications all at once.
Negotiate or restructure your debt, rather than getting a default
If you can’t pay your debts, speak to a credit counselling service immediately. They will help you to renegotiate terms with the bank. Rather than writing off your debt (a default), you may get a longer loan tenure, or a lower interest rate. Most banks are willing to do it as they’d rather recover less money, than no money.
If you get a default, it remains on your credit score indefinitely. But a restructured debt repayment might be taken off your credit report, a few years after you’ve settled it.
On a similar note, avoid closing your credit accounts when you still have unpaid debts on them. Resetting your credit score starts with paying off any debts, regardless of whether you are still using the account or not.
Aggressively pay down your debts, before a big loan application
Your recent repayment history (within the past year) matters more than your repayment history from, say, four to seven years ago. That means immediate changes to your credit score can be made within the year.
Prior to any loan that requires a good credit score (such as a home loan), go on a debt repayment spree. Tighten your belt and make a few sacrifices, to wipe out as much of your debt as you can within the year.