Considering applying for a car loan or mortgage in the near future? If so, you might want to give your credit score a quick check as it could determine whether or not you're likely to be approved.
If you're not too sure what a credit score or credit rating is, you're not alone. In fact, many Singaporeans aren't aware of what their credit rating is or how exactly their credit score is calculated.
If you haven't been tracking your credit score or aren't sure why you need to, there's no need to panic. It's never too late to learn how to improve your credit score and maintain a good credit rating thereafter.
Here, we break down all you need to know about credit scores, why they're so important and how you can improve yours.
- What is a credit score?
- Why is a credit score important?
- How do I fix my low credit score?
- How to check your credit score
What is a credit score?
A credit score is a score calculated for every credit card or loan holder to determine how creditworthy he or she is. In other words, this score gives financial institutions and lenders an idea of how reliable you are at making your payments on time.
Data of your payments, open credit lines and the number of your open accounts across banks are tracked and aggregated by the Credit Bureau of Singapore (CBS) which then calculates your credit score and determines your credit rating.
This credit rating and score are then accessible to all potential lenders when you apply for a loan with them as a way of deciding if they should lend to you or not.
Why is a credit score important?
The importance of maintaining a good credit score cannot be understated. It determines how likely you are to be approved for a loan and how creditworthy you appear to financial institutions.
A healthy credit score can open a lot of doors in applying for loans and other lines of credit, while having a subpar credit score will be a huge barrier standing in your way every time you fill in those applications.
On top of that, your credit score even determines the interest rates you pay on loans and credit cards.
A low credit score signals to lenders that you're a high-risk borrower who may have trouble paying back the sum you owe. As a result, you will be charged a higher interest rate and will end up paying more in total over the course of your repayments.
| See more: Credit scores: What are they and how do they work? |
How do I fix my low credit score?
What if your credit score already isn't in the best shape? You may be wondering if it's possible to improve your credit rating and reverse the damage.
Fortunately, the answer is yes!
It's never too late to start taking steps to better your credit score to improve your interest rates and odds of getting approved for loans in the future.
In order to raise your credit score, you'll need to understand the main factors used to calculate them.
Paying credit cards in full on time
The number one rule for getting your credit score back on track is to pay your credit cards in full by their due dates each month.
It may be tempting to pay only the minimum balance each time you receive your statement.
However, as long as you can afford to pay the amount in full, it's always best to pay your total outstanding balance to avoid racking up late fees and accumulating interest as these can snowball before you know it.
While paying the statement balance alone monthly won't result in penalties or late fees, the best amount to pay is still your current outstanding balance in full by the due date in order to maximise your credit score more quickly.
Number of credit cards
It's best to keep the number of credit cards you have at any given time between 2 - 4 at once ideally. Any more than 4 credit cards will be a sign to CBS and banks that you may be taking on more credit than you can manage and pay off monthly.
| See more: How many credit cards should I have? |
Keep credit utilisation low
Credit utilisation is another factor that can heavily affect your credit score. Your credit utilisation ratio is essentially your debt-to-credit ratio or the ratio of your expenses on your credit card against your credit limit.
If you're maxing out your credit card every month, your credit score will reflect that and start to reduce.
Ideally, you'll want to keep your credit utilisation ratio to no more than 30% of your credit limit per month.
Number of loan applications
Applying for too many loans may trigger hard enquiries from financial institutions who may see you as in desperate need of credit.
A hard enquiry is when a bank files a request to look at your credit score. Each time an enquiry is made, the request is logged.
The number of enquiries into your credit profile is also accessible to financial institutions and too many enquiries could be an indication that you may be taking on more debt than you should.
This affects your credit score in the long run and banks and lenders will be much less likely to approve your loan applications in the future if they see you as too credit-happy.
Defaulting on loans or credit cards
Defaulting on loan repayments or credit card debt is definitely going to leave a massive dent on your credit score as lenders will categorise you as a risky borrower in the future.
Ignoring credit card statements, follow up calls from creditors and pretending your debt does not exist will do nothing except harm your credit rating.
To avoid this, always be sure to follow up with your bank or credit counselling service immediately to negotiate a repayment or debt consolidation plan which is manageable for you.
Never swipe and run, as defaulting on your loans or credit cards is a surefire way to damage your credit score, drive up future interest rates offered to you and significantly reduce your chances of being approved for future loans.
Age of open credit cards
The longer your credit lines stay open, the longer your credit history. The longer you maintain a good credit score, the higher your credit score will be.
When closing unnecessary credit cards, try to cancel the most recent ones applied for in order to hold on to the longer credit history attached to older credit cards. This gives you a better chance of keeping your credit score intact.
How to check your credit score
If you've never checked your credit score and want to know where you stand, visit the CBS website to find out.
And remember, no matter what your score is today, it's possible to take steps to improve your credit rating in the long run. It may take some patience and discipline with your finances, but with time, you're sure to see improvements.