You’ve probably heard the term “credit scores” one too many times. What exactly is it? How does it affect you? When do people look at my credit score?
Let’s say you are looking to take a personal loan from a financial insitution. Lenders will need an indicator to know whether a person will default on a loan or will pay faithfully. Today, the credit score is that indicator.
People with a higher score are good debtors who pay their debts on time. Those with poor credit are poor at paying back and represent a higher risk of default. People who hold an average score can go either way. Banks and other financial instituions rely heavily on the credit score to find out if one is going to pay back their money or if they will default on payment.
The credit score might sometimes be used to determine how much interest one will be charged for a loan. Good credit scores attract the lowest rates because the chances of loss are less. People with average credit scores tend to get a higher interest rate than those with good scores. Poor debtors, those with bad credit, will usually be charged very high interest rates because they are a great risk to the lender. In charging very high interest, the lender is mitigating risk, and hoping they can recover as much money as possible before the person defaults, if he or she does choose to default.
Loan Approval And Credit Score
It is important to understand how credit scores affect loan approval. Basically, most traditional banks and other lenders will refuse credit to those with a poor score.
This means that applications will be rejected repeatedly until one is able to improve their score. Licensed moneylenders in Singapore have more lenient requirements where the credit score is concerned and have even designed loans for people with poor credit. The challenge is that they too might not take a big risk on such a person. Therefore, such a person can only get small loans approved. When they need to take out big loans such as to buy a big-ticket item, or a home, they will have to make improvements to their credit score.
With a good credit score, the options are limitless. You can shop around for good deals and get them. Unless there are other factors affecting approval such as the income level, or the current TDSR (Total Debt Servicing Ratio), you are most likely to have your loan approved because the risk of lending money to you is lower. The benefits of good credit will significantly increase your chances of loan approval and the very lowest interest rates in the market.
Improving One’s Credit Score
The good thing is that if you have average credit or poor credit, you can do something about it! You are required to work on your credit for a few months or a year to take it from bad to good, and from good to great. Here are some tips to making it happen:
1. Review And Rectify The Credit Report
This is the first place to start. Request a copy of the credit report and go through it to ensure that everything is correct. The things listed within the credit report make up the credit score. If there is a mistake with the report, there will be a mistake with the score. Once you notice the mistakes, it is important to get in touch with the credit bureau and have those fixed. Disputing the accuracy of items such as previous enquiries, account status, and even overdue balances is allowed, and while the Bureau is working to countercheck and rectify those issues, there will be a notice on your file showing that those things are under investigation.
2. Timely Bill Payment
One of the worst late payments to make is on a credit card. It has great impact that lasts a long time. If there are more unpaid bills or late payments reflecting on the account, the impact on the credit score will be greater and the recovery time will be longer.
Therefore, it is prudent to ensure that bill payment is made on time, all the time. One of the most effective indicators of whether you are a good debt payer or not is how you use your credit cards. How you charge your purchases, and how you make payments from month to month.
One of the best things that you can do for yourself is to ensure that your monthly credit card payments have been paid off in full. If that is not possible, paying well above the minimum payment will indicate that you are keen to reduce and even eliminate the credit card debt, which is a good sign. Outstanding balances or rollover balances tend to be charged above 24% interest, which is good for the credit card company and bad for you as the borrower.
3. Don’t Apply For Credit In Various Places At Once
When the lender checks your credit score and finds out that you’ve been borrowing from various financial institutions, imagine how that must feel? The more creditors send enquiries, the more it adversely affects the credit score because it comes off as you being desperate for finances. It is therefore prudent for you to first carry out due diligence on the various lenders and their terms, then narrow down to 2 or 3 that you can approach and put in a loan application.
4. Active Credit
This is generally done by keeping credit cards active. Some people pay off their cards but then do not re-use them, which means that their credit becomes inactive. The goal of using the credit card and paying it off is to make sure that creditors see the credit user as a person who can responsibly use credit.
When you have no recent credit for the lender to assess, the lender can deny credit based on insufficiency of credit activity, which means that you do not have a score. The way to rectify this is to ensure that credit cards are being used responsibly by staying well within credit limits and paying off the balance in a timely way.
5. Make Long-Term Changes
Rectifying credit mistakes is not a short-term thing because most of these records remain in your credit report for a while. Default records, for example, will remain for 3 years. Bankruptcy will remain for 5 years. This means that whatever changes you decide to make must be for the long term. Here are things that you must do from time to time to ensure that your credit score is always improving or remains good:
- Make sure that you get your credit report on a yearly basis and check it thoroughly to rectify any mistakes that may be reflected there.
- Ensure that all bills are paid in a timely fashion. This will mean becoming better organized and making sure that reminders are set to keep you on track.
- Ensure credit card balances remain low. Not only does this prove that you are a responsible borrower, but it also keeps the TDSR (Total Debt Servicing Ratio) low which further shows responsibility.
- Avoid applying for credit with many different lenders at the same time or within a short time.
- Ensure that your credit remains active.