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).
1. 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).
2. 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.
3. 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.
4. 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.
5. 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.
6. Defaulting
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.
7. 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.
(This is an editorial from SingSaver.com)
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