A poor credit score keeps you from getting bank loans and credit cards. Watch out for these common mistakes that ruin your credit score. Your credit score is all-important when it comes to loans. From getting a house to an education loan, critical life opportunities can come down to a number and a single letter on a sheet of paper. So you’d be surprised that some of the little things you do make an impact on your credit score for the worse.
How Credit Scores are Calculated
Your credit score is determined by an algorithm. The company that owns the algorithm keeps it secret, so it’s method cannot be copied by others. For that reason, we don’t know the exact details of how your credit score is affected. However, there are a couple of behaviours that affect your eventual score. (Foreigners should note that their credit rating elsewhere will not affect their credit score in Singapore, or vice versa).
- The Total Amount You Owe or Number of Credit Accounts You Have
The more money you currently owe, the worse your credit score will be. Note that the number of different accounts matters as well: If you don’t owe much, but you owe small amounts scattered across six credit cards, two lines of credit and a personal loan, your credit score can still be quite bad. This is why it’s a good idea not to have more than two credit cards (it’s confusing to keep track of multiple billing cycles anyway).
- Taking Too Many Loans Within a Short Time Period
If you apply for multiple forms of credit in short order (e.g. you apply for three personal loans in Singapore within a month), your credit score will drop. It is assumed that your financial situation has taken a turn for the worse (or is about to) when you take multiple loans in a short time. In Singapore this often happens with first time homebuyers, who take a personal loan to cover the down payment on top of a home loan. You can get around that by saving enough for the down payment, or by using a HDB concessionary loan, which lets you make the entire down payment with your CPF. When taking loans, work out how much you need and take it out in a single loan. Don’t take out one small loan, realise it’s less than you need, and then take out another loan later.
- Late Payments
Credit cards and lines of credit require a minimum repayment before the billing cycle ends. This is often S$50 or 5% of the amount owed, whichever is higher. Other loans, such as a student loan, car loan, or personal loan, may have fixed repayments. If you are more than 30 days late on the minimum repayment, you will be considered delinquent. If you often incur late fees (around S$60), you probably have a credit rating that indicates delinquency. The only way to fix this is to make reliable, timely repayments. Over the course of a year, your credit score will improve. If you are going to be late with repayments, call your bank in advance and inform them. They are sometimes willing to work out an alternative mode of repayment with you.
- Your Credit History
If you have a history of reliably making repayments, you’ll have a good credit score. This impacts many crucial financial decisions. For example, when you are buying a flat, a bank can loan you up to 80 per cent of the flat’s value. But if you have a bad credit score, you may only get 60 or 70 per cent. If you never use credit at all, your credit rating will be Cx. This is not desirable, as banks have no understanding of your history, and you are unknown risk. It is equally plausible that you will not get full financing for your flat, if you have no credit history at all.
To get the best results, have at least one credit card that you use as a mode of payment only (i.e. you always pay it back in full). This will build your credit score while avoiding any kind of interest.
- Submitting Too Many Loans and Credit Cards Applications At Once
If you hope to submit applications to several banks and decide at a later time which bank you will eventually take up the loan or card with, you are hugely mistaken. Every time you apply for credit from a bank – regardless of whether you have finished the application process or not – the bank will look up your credit score. If there are multiple enquiries within a short time, your credit rating will drop. This is called being “credit hungry”, and it’s assumed you are facing some kind of financial difficulty. If you have been turned down for a loan, for whatever reason, try to wait a month before making another credit enquiry. Don’t knock on the doors of a dozen banks in the space of a week, and show a desperation for credit. It is therefore essential to check up your credit score on Credit Bureau Singapore before and compare interest rates between loans and credit cards before you submit any applications.
A default occurs when the bank writes off your debt. Unsecured loans, such as credit card loans and most personal loans, do not have any collateral – if you cannot pay them, the bank will simply have to treat it as a loss. This is not a good thing. A single default can ruin your credit score for years to come, as it will show up on your credit report indefinitely. There are people who will never be able to buy a house or get their degree, because a default ruined their chances of getting a loan. Don’t be one of them.
- Bankruptcy and Pending Litigation
If you are a declared bankrupt, or are in the middle of legal complexities (e.g. being sued), most banks will not extend credit to you. You may still be able to get small loans of S$500 or less, as your credit score is not usually checked for these amounts. If you have been discharged from bankruptcy – by which we mean you have an official letter of discharge from the Court – the bankruptcy will be removed from your credit report after five years.
Rohith Murthy, Co-founder and Managing Director, SingSaver.com.sg
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