Don’t underestimate the all-important credit rating which gives the crucial credit score as it plays a highly important role in loan evaluation process. Even if you are confident in getting a loan approved, it is best to make sure that your credit rating will be at its best by taking positive steps to build it up.

I believe most Singaporeans who have never applied for a loan before are not aware that their financial details are already being collected and rated over the years since they started working. In fact, you might not have come across or understand the terms credit report/rating/score. These are terms that refer to some of the critical processes and tools used in evaluating the risks of an individual involved, in loan applications used by banks and other types of financial institutions. They play an important role in whether a loan application is approved or rejected. In other words, they determine to a large extent your ability to get loans and credit cards depending on how healthy a credit rating you have.

Thus having a good credit rating is vital for the would-be loan applicant as it is the rating assigned to you by Singapore’s two credit bureaus which are the DP Credit Bureau Pte Ltd and the Credit Bureau (Singapore) Pte Ltd. The two credit bureaus collect financial data sent in by banks, financial institutions, companies, organizations etc., and rate them based on a score rating system. The higher the score, the better the chances of your loan getting approved, and with a larger amount of loan given. So the question at hand is really how one can have a good credit rating or improve it and get better deals on loans. Below are the following ways or practices one can use or inculcate into one’s financial habits to achieve this goal.

Check your credit report and rectify the mistakes

Source: SG Money Matters
Source: SG Money Matters

Because no system is perfect, there is always the possibility of a mistake in the credit data recorded by the credit bureau. So it is wise first to obtain a credit report from them which normally costs around $7.00 (including GST) per copy before applying for any loans. If there are any mistakes, quickly follow-up and inform them to resolve it as mistakes may be a factor that pulls down your credit score. It is recommended that you make it a habit to check your credit rating at least every 6 months to once a year.

Control your utilization pattern of credit (your spending activity)

Control your spending activity.

I believe that cutting down on unnecessary spending is always a good practice in having a good credit score. The credit bureaus will monitor your credit usage patterns of credit facility such as large purchases or transfers, especially in credit cards. Banks might be concerned about a sudden change in your spending patterns, and this might result in them not being so willing to extend new leases of credit to you. With this, you may not be getting your loan, or it may reduce your chances of getting one approved with the quantum you want.  Notably, peer to peer (P2P) crowdfunding platform provides an alternative source of capital that even creditworthy individuals with relatively poor or no credit rating can obtain loans from.

Limiting your recent credit facilities

The number of credit facilities you have or is linked to you such as overdraft facilities, letters of credit, revolving credit, credit term loans, account receivable loans, credit advances, and credit extensions may be considered as liabilities by banks as they could perceive that you are overextending yourself. So, it is wise to limit these credit facilities personally as well as in your businesses that are reported on your credit report.

But contrary to the above it should be noted that having a fair number of credit accounts accrued over a long period (for example, ten years or more) may prove to lenders that you are creditworthy. But I believe this will only work in your favour if you keep a clean record of ‘on time payment’ of bills and repayment of loans resulting in a healthy credit rating.

Pay bills and make loan repayments on time

Paying bills (as in credit cards) and making loan repayments punctually is a good habit you should foster as it not only avoids the stresses associated with late payments but more importantly, banks and other financial institutions will see your paying habits reflected on your credit score. Even 1 to 2 late payments or non-payments can decrease your overall credit rating. Your percentages of ‘on-time payments’ or consistency in paying bills are one of the most highly considered factors in credit score evaluation. Banks also view this as a necessity as it tells them that in possible future loans, you are a responsible borrower and a manager of your finances. So avoid making late or minimum payments on your credit cards even if you don’t mind late payment penalties and always try to make loan repayments on time.

Reduce your debt to credit ratio

It helps if you always try to reduce your credit utilisation ratio – the ratio between your debt and your credit available to you whether from credit cards or any other credit facility. The ideal ratio is between 1 to 20%. Interestingly to note though, income does not affect your credit score directly as it may be hard to get a loan approved even with a low debt to income ratio.

Reduce availability of credit (from credit cards) assigned to you

The number of credit cards you possess directly affects the number of accounts you have with various banks in Singapore. Although this might increase your debt to credit ratio, banks may view this negatively with you having too many credit cards especially if you have utilized more than 30% of the credit available to you.

Avoid multiple new credit applications within a short period

Avoid multiple credit card application.

Making a few new credit applications over a short time span can push you from being deemed as a responsible consumer to an unreliable one from a bank’s viewpoint. When you make these applications, the banks will make enquiries about your financial details with the credit bureaus which will all be recorded and seen by other banks in future enquiries. Records of two years of previous enquiries are retained on your credit report and an accumulation of enquiries in a short span of time will make it look like you are desperate for funds. This, of course, is viewed negatively by banks and may affect your loan approval in future. Whatever is the case, it should be noted that every bank has a different set of requirements and criteria when it comes to the above issue. However, P2P platforms such as Funding Societies and others usually have their independent credit rating systems which tend to ignore the mainstream credit rating systems and list of criteria. This, of course, is good news for entrepreneurs who usually do not stand a chance of getting a loan approved by banks. Recently a new mobile app has been introduced to Singapore which facilitates effortless applications for loans from Funding Societies.

Avoid becoming a bankrupt and having derogatory remarks on your credit report

Bankruptcy will affect a person’s credit score terribly and should be avoided at all cost if possible as it will nullify one’s ability to get loans even after many years the person is no longer bankrupt. The details of it are retained on your credit report for 5 years from the date of discharge from bankruptcy. Other kinds of derogatory remarks on the credit report shown are such as the default of loan repayments, bankruptcy proceedings, and being under a debt management program. All these will affect your credit rating negatively and also your chances of getting a loan approved by banks.  

Keeping old credit lines open

Having too many credit cards is certainly a problem. But if you close your old credit cards accounts, you may lower your credit score as it reduces your credit limit and thus increases your debt to credit ratio. What happens is that this may reduce the average age of your open credit lines when you close the old accounts. So instead it may be a better idea to regularly make small purchases using those old credit cards and pay them off immediately to keep them open and active. This practice, which I reiterate, also keeps your credit cards active, when sustained over a period, will help build your credit score.

Summary

The credit report states the credit rating given to an individual and has a specific credit score assigned to it. This credit score is not usually looked at by the banks, but instead, the credit grade which is given concurrently with the credit report is considered. AA is the best and HH is the worst. In some countries, the interest rate of a loan given is directly proportional to the credit rating of the individual. But in Singapore, if you have a bad credit rating, you’re either denied the loan or asked to take a smaller loan.

For your extra information, the details that are included in a credit report are – specific details about an individual e.g. name, profile, (not including physical address/phone contacts), details of past credit checks or enquiries on the individual, trend of credit repayment for a specific year, records and details of defaults including dates of defaulting, records and details of bankruptcy up to 5 years after a person has been discharged, closed or terminated credit accounts usually records for 3 years after the date of closure, statistics and aggregates of owing balances as well as of allowed credit lines.

In conclusion, I believe it is true to say that having a good credit rating is not only vital for your business, but it also impacts your daily life positively. In fact, some companies not only require that job seeker, seeking employment with them, should provide them with a credit report of themselves, but that they could also lose the opportunity of being employed if their credit report is a negative one. A bad credit rating will also result in one not getting crucial loans or at least lower the loan amount obtained.  All of these translate to lost opportunities in life and business. Therefore, it is prudent if not wise to maintain a good credit rating or at least to know how to improve your credit score if it isn’t too positive to begin with. So don’t waste time, take action now and start having a good credit rating to stand a chance of getting better deals on loans.

 

Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)

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