Have you ever submitted an application for a credit card or a credit line loan and got rejected?
If so, it was probably the result of a problematic credit score.
What is a credit score? In today’s article, we will look at the importance of a credit score and if you are applying for a housing loan, how it can affect you.
What is a credit score?
A credit score is a four-digit number the Credit Bureau of Singapore (CBS) uses as a rating, which is based on one’s past payment history with loans.
The score ranges from 1000 to 2000.
The lower the number, the lower the likelihood of a successful application. Individuals with a high score are very likely to get their applications approved with the desired loan amount.
If you have a bad credit score, it is likely that you will not be able to get the full loan amount. In the worst-case scenario, you will receive an outright rejection of your application.
The full credit score range is in the table below.
Source: Credit Bureau Singapore
When you submit an application for a loan or credit line, banks/lenders will check your credit score report from CBS. This is done to assess whether you are likely to repay the money and the probability of you defaulting on payments.
As you can see from the table above, individuals with a score of 1911 to 2000 have a risk grade of AA, which means that the chances of defaulting on payment are very unlikely.
Those with the lowest score of 1000 to 1723 carry a risk grade of HH, which is the group with the highest possibility to default on payments. It is very likely that their applications will be rejected.
There have been times when individuals without a bad credit score were unsuccessful in their loan applications.
This is due to other factors that the banks/lenders consider when approving loan applications.
Such other factors can include annual salary, length of employment, number of credit facilities you have and if you are involved in any bankruptcy/litigation cases.
How is credit score determined?
There are several factors that can affect your credit score and if you want a good score, you should take note of the following:
Number of active credit accounts. Having multiple credit facilities with multiple banks/lenders may lower your credit score.
Recent credit. It is best not to apply for several credit facilities within a short time. This gives the impression that you are in dire need of cash and may not have the ability to repay it.
Utilization pattern. If you already have credit facilities and have utilized them, your score will be reduced as this indicates how much debt you currently have. If you have taken up car loans, personal loans etc, your score will be lowered significantly.
Late payments. This is an obvious red flag. Making late payments is a sign that you are not in good financial standing and are unable to repay on time.
Public records. Banks and lenders will also take into consideration records of bankruptcy proceedings. Individuals with such records are deemed to be high-risk. It is important to note that such records will be retained for 5 years from the date of the bankruptcy discharge.
How to improve your credit score?
One’s credit repayment history for the past 12 months is used to calculate the score.
So if you want your score to improve, you have to be disciplined and keep a keen eye on your financial management.
Keep the number of credit facilities to a minimum. The lesser accounts you have, the better your score will be.
Avoid using multiple credit cards. CBS will look at your total credit card exposure. If you have credit cards that you do not make use of, cancel them and consolidate your card usage with the one that offers the best benefits.
Punctual payment. Always pay on time and in full to avoid getting into more debt. Credit card roll-overs incur a very high-interest rate of more than 24% per annum. Avoid at all costs defaulting on payments!
Credit monitoring service. For those who have difficulty keeping track of their finances, CBS has a credit monitoring service called My Credit Monitor (MCM) to help you keep track of your credit report over a 6 or 12-month period. This service protects against identity theft and detects suspicious activities and changes that can affect your score. This is a subscription tool service and can be found on the CBS website.
How does credit score affect your housing loan?
Having a bad credit score will definitely affect your chances when applying for a housing loan from a bank or lender.
In most cases, applicants with a bad credit score will not get the full loan-to-value (LTV). In some cases, they will encounter an outright rejection of their applications.
If you are not able to get the full LTV, it means that you will have to cough up more cash.
If you do not have a good cash flow, you may end up not being able to purchase that dream home.
Applicants with a good credit score will get a bigger loan amount (subject to the maximum LTV) and in certain cases, enjoy more favourable loan terms.
If you are applying for a housing loan and want to maximize the loan amount, you will need to reduce the impact of a low credit score quickly.
The fastest way is of course to pay as much of your credit cards’ outstanding debt as possible. This will ensure that you are less of a liability.
Obviously, while you are paying off the outstanding amounts on your credit cards, do not charge any more to them.
In summary, a bad credit score not only affects your loan applications but may also affect your job prospects, especially in the Public Service and Finance sectors.
In fact, the Monetary Authority of Singapore (MAS) has made it mandatory for financial institutions to run credit checks on their employees.
So, if you currently have a bad credit score, take charge now. Follow the above tips to achieve a better score. Good luck!
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