Cash woes? A personal loan to the rescue!

    How do Credit Ratings affect your Personal Loan Eligibility

    Personal loans can be used to fund any financial need that you may face such as paying off your credit card debt or wedding expenses. For financial needs with respect to your home, education or vehicle, you can apply for a home loan, education loan or a car loan, respectively. For all other financial needs, you can opt for personal loans also known as unsecured loans.

    Factors affecting your personal loan application

    Lenders take into account several factors before approving or rejecting your personal loan application such as:

    • Employment and income: The applicant should have a stable employment and steady income to reassure the lenders that he or she can repay the loan on time.
    • Age: Applicants aged 21 to 65 years are eligible to apply for personal loans in Singapore.
    • Credit score: A low credit score can negatively affect your personal loan eligibility. Lenders will request your credit report from a credit bureau known as hard enquiry, to check your credit score. Based on your credit score, the lender will approve or reject your loan application. A low credit score translates to a high interest rate and a low loan amount.

    Applicants with bad credit scores should have a high income and stable employment to obtain a personal loan or any line of credit.

    What is a credit score?

    A credit score or credit rating represents your creditworthiness. Financial institutions submit your payment information to consumer and commercial credit bureaus. Credit Bureaus like CBS (Credit Bureau of Singapore) and DP SME Commercial Credit Bureau assess your creditworthiness based on your credit history. Following are the factors that affect your credit score:

    • The number of open credit lines such as loans and credit cards that you have.
    • Your debt-to-credit ratio has to be between 1-20%.
    • The number of hard enquiries made by the lenders in support of your loan application.
    • Your credit card and loan payment history.

    Why is credit score important to apply for a personal loan in Singapore?

    Most banks in Singapore offer personal loans starting from a minimum loan amount of S$1,000. For loan amounts above S$500, your credit score will be taken into account by the lender while processing your loan application. Therefore, it is important to have a good credit score to successfully obtain a personal loan.

    Common mistakes that negatively affect your credit score

    Listed below are some common mistakes that can have a negative impact on your credit score:

    • Most Singaporeans have more than 2 credit cards depending on their lifestyle and financial needs. Too many credit cards and loans can affect your credit score as it can be difficult to keep track of all the billing cycles and you are bound to default on your payments.
    • Applying for several loans simultaneously can negatively affect your credit rating.
    • Failing to make minimum monthly payments on your credit card bill on or before the due date can affect your credit score. Usually, the minimum monthly payment per credit card is S$50 or 5% of the amount due. You will incur a late payment charge for defaulting on your card payments.
    • Having a credit history is important as the CBS calculates your credit score based on your credit history. To have a credit history, you need to have at the least one credit card or loan. If you don't have a credit history, your credit rating will be CX (non-existent credit history) which is not favourable for obtaining loans.
    • Borrowing more than one loan within the same month can be perceived as financial trouble and your credit rating is bound to drop.
    • If you are not in a position to pay off your loan, then the bank will write it off as a loss. Defaulting on a loan can go on record and stay there for years preventing you from obtaining a loan in the future.
    • Declaring bankruptcy can ruin your credit score. It will appear on your record for 5 years after being discharged from the bankruptcy charge. Your credit rating during the court proceedings will be HX.
    • Closing accounts with existing debts can also negatively affect your credit score.

    What happens to your credit rating if you declare bankruptcy?

    When an individual's financial situation is beyond redemption, it makes sense to declare bankruptcy. Though this move may offer you a much needed relief from financial responsibilities, it has a negative effect on your credit rating. The bankruptcy filed against you will appear on your credit report as risk grade, HX for 5 years after your discharge from bankruptcy.  You can't leave the country without obtaining permission from the respective officials during the court investigation. You can also not obtain any loans while your credit rating is HX.

    Ways to improve your credit score

    You need a good credit score to successfully apply for a personal loan. Listed below are some of the easy ways in which you can improve your credit rating:

    • Pay your credit card bills and loan EMIs on or before the due date. Ensure you don't default on your loan payments or credit card bills. Outstanding credit card dues will have a negative effect on your credit score. Same goes for unpaid loan installments.
    • Go through your credit report once a year to check for any errors. If there are any errors, then inform the credit bureau immediately for correction.
    • If you are applying for a loan, don't approach several lenders simultaneously. Lenders will ask the Credit Bureau of Singapore for your credit report and several hard enquiries at the same time can reflect badly on your credit ratings.
    • If you have any credit cards that are not in use, cancel those to avoid monthly billing cycles.

    To ensure a smooth loan approval process, maintain a high credit score by paying your credit card bills and loan EMIs on time. A good credit score can encourage the lender to give you a lower interest rate and a favourable loan amount.

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