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Credit Ratings: Bad Credit vs. Good Credit

All major financial institutions in Singapore need your credit score to make a decision about whether to offer a credit card or loan to you. Credit scores and credit ratings are part of the credit report, which is generated by credit bureaus. There are two such organisations in Singapore - the Credit Bureau Singapore (CBS) and DP Credit Bureau (DPCB). CBS is, of course, the more popular one, and we will talk about that in detail.

A credit report describes your credit history and debt behaviour, analyses the data, and assigns a risk grade and score. The credit score also helps you manage your debt effectively.

You can purchase a credit report either online or offline. It can also be accessed by lenders whenever you apply for a loan.

How Does Credit Rating Work in Singapore?

Credit Bureau Singapore (CBS) gets customer’s payment data from financial institutions, banks and through public records. Once CBS gets the data, they will aggregate them and provide them to the banks upon request. The credit score ranges from 1,000 to 2,000 and a risk grade is assigned to a particular score range. The risk grade ranges from AA to HH. The higher your score, the lower your chances of defaulting on a loan.

‘Good’ and ‘Bad’ Credit Rating

A score range of 1,911 to 2,000 will put you in the AA risk grade. In other words, you have a good credit rating that will get you a loan with ease. If you have a score between 1,000 and 1,723, you will be put in the highest risk grade of HH and be tagged with a bad credit rating, indicating a very high possibility of default.

Why Is It Important to Have a Good Credit Rating?

It is very important for you to have a decent credit score to improve the chances of your getting a line of credit. Your credit rating will have a huge impact on your ability to get any form of credit, whether it is for applying for a credit card with a good cashback programme or taking out an education loan for your kid. Potential lenders will use your credit rating to decide whether to grant you a loan or not. The same rating can also decide how much interest you will pay with your loan. If you have a low credit rating, lenders may consider you a negligent borrower. Even if you get an approval for your loan, a low credit rating is likely to result in you having to pay more as interest.

Factors That Will Affect Your Credit Rating in Singapore

Here is a list of factors that will affect your credit score in Singapore:

  • Disparaging marks on your credit report

All instances of default such as bankruptcy proceedings, debt management programmes will appear under the section ‘Summary’ and will have a negative impact on your score.

  • Average age of open credit lines

Avoid closing your old credit card accounts. Instead, you must frequently make small purchases using your old cards and pay them off instantly and keep them active. A long credit history will give lenders more insight into your credit behavior, thereby, strengthening your case. Having no credit history (a grade of CX indicating “Insufficient Credit Activity”) is also detrimental to your application because lenders will have no way of assessing your credit behavior to determine the risk of lending.

  • Credit Utilisation Ratio

Credit Utilisation Ratio is the ratio of your debt and your credit. Ideally, your debt-to-credit ratio should be somewhere between 1% and 20%. The ratio gives an indication to your potential lenders that you can use your credit responsibly and you are not dependent on it financially.

Steps You Can Take to Enhance Your Credit Rating

It is practically impossible to bring about a significant change in your credit rating in a short span of time. However, you can definitely boost your rating gradually. Here are the steps that can you take to enhance your credit score:

  • Check your credit score on a regular basis and make sure that there are no discrepancies. If there are any inconsistencies, report it to CBS immediately. They will escalate the issue with the financial institution or bank and will make arrangements to correct it.
  • Apply for a credit card or take small loans on a regular basis and repay them fully and on time. This will indicate that you can manage your loans properly. This will especially help build your credit history, if you do not have one yet.
  • Develop a system with the help of which you can keep track of your payment dates. Try to pay your loan instalments and card bills a few days before the due date. By doing so, you will make sure that you do not forget to pay your dues and damage your credit score.
  • Never default on a loan because if you do, the data will find its way to your credit report and your credit rating will take a huge hit.
  • Avoid applying for too many loans and even if you do, space it out as all lenders will ask for your credit report even if you make an enquiry without actually going taking up the offer. Too many enquiries within a short span will indicate that you’re already in debt.
  • Late payments will always be caught and it will find its way in your credit report. In case you don’t have enough funds to pay your monthly loan instalment, you should at least pay the minimum amount by your payment due date.

Never underestimate the importance of your credit score even if you think you can qualify for a credit line using collateral. In order to get the best rates, you will need a good credit score. Besides, you can use your savings or security to invest and expand your wealth portfolio or as retirement savings rather than carve a bigger debt for yourself.

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