Note: Credit rating and credit score will be used interchangeably and they have the same meaning for this article.
What is a Credit Score
Credit score is a score that creditors use to determine how likely you are able to repay them in time should they decide to extend the loan to you.The credit score calculated by the Credit Bureau Singapore (CBS) is a four-digit number score based on your past payment history on your loan accounts.
The score ranges from 1000 to 2000, where the higher the score by an individual, the lower the chance of individuals reaching a delinquency status. Together with the score, the risk grade and the probability of default is provided as shown in the picture.
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Why is your Credit Rating Important?
Having a good credit score is important because the your chance of having access to lower interest loans and premium credit card rewards.
Your credit score can also influence the amount of premium you pay for the life insurance and landlords can use it to determine if they want to rent you the property.
How Financial Institutions Calculate your Credit Score
1. Recent Credit Activity
Your credit score is calculated based on the number of credit facilities under your name. The more credit facilities applied, the higher the liability. Hence, adversely affecting your credit score.
Do you really need a credit card for every type of discount? If not, I would advise you not to apply. Do not be tempted by their freebies! Weigh the benefits of the freebies versus the implication of your credit score.
2. Account Delinquency Data
Late payment or partial payment for your credit facilities can negatively impact your credit score. Try your best to make full payments on time to maintain or improve your credit score.
3. Credit Account History
How long you have been with the same bank can impact your credit score. The longer you stay with the same bank signifies that you are a loyal and reliable customer (assuming you have a good track record of payments), boosting your credit score.
4. Available Credit
Your credit score can also be calculated by your credit utilisation ratio, which is the total amount of credit available versus how much you are using. Nonetheless, the lower your credit utilisation score, the better it will be for your credit score computation. It signals to the banks that you have a good management of money and is not at risk of over-spending your limits.
How Can you Improve Your Credit Rating?
1. Practice good spending habits. Avoid going into debt.
2. Limit the number of credit facilities that you have across the different banks
3. Avoid late payments, missed payments and partial payments.
4. Do not close credit card accounts that are unused
It is fine to keep credit card facilities that you do not use open. I know! It contradicts with my point above. If you have a ‘spare’ account, leave it. If not, don’t open an extra credit facility to improve your credit rating!
The reason is keeping your unused credit cards open will improve your credit utilisation ratio. Higher credit available to the same amount of credit used.
5. Do not apply for too much new credit, resulting in multiple inquiries
Applying for too many credit facilities may negatively impact your credit score as it creates a hard inquiry on your credit report. Having too many hard inquiries can negatively impact your credit rating though they only remain on your credit report for two years.
A hard inquiry occurs when a financial institution with whom you have applied for credit reviews your credit report as part of their decision-making process. This hard inquiry appears on your credit report and can impact your credit scores because there is a concern that if the loan application goes through and you are unable to meet the demands of the repayments. Examples of when the financial institution makes a hard inquiry will be when you apply for mortgage loan, auto-mobile loan etc.
On a side note, a soft inquiry is where you as an individual check your own credit or when a financial institution checks on your credit to pre-approve you for an offer. Soft inquiries do not appear on your credit report and do not impact your credit rating.
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How Long does it take to improve a Credit Rating?
Only time can cause the credit rating to improve your credit rating.
Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years.
Inquiries remain on your report for two years.
This implies that you have to do your utmost to prevent a negative impact to your credit rating as it takes a long time for your credit rating to improve.
Where can I access my Credit Report?
You can purchase a copy of your credit report via eNets or Credit Card at SGD$6.42 (inclusive of Goods and Service Tax).
Source: DBS, Experian, CBS