Credit Scoring 101: Benefits of High Credit Ratings in Hong Kong
Consumers in Hong Kong should seriously start paying more attention to their credit scores. An article published on the newsroom of TransUnion.com revealed a survey that indicated how consumers in Hong Kong are behaving when it comes to credit use.
Angus Choi, the Managing Director of TransUnion in Hong Kong revealed that 1 out of 3 respondents in the survey admitted that they did not keep track of their credit activities. These respondents also admitted that they fail to pay their debts (personal loans and credit card balances) on time. The article concluded that it is obvious that consumers in Hong Kong have a lot to learn about their credit scores and its role in their financial life.
What are credit scores?
A credit score is like your body temperature – it measures your credit condition at a certain point in your life. It varies from time to time – depending on what is reflected in your credit history and how you behave when you use credit.
It is calculated based on the credit report that is compiled by credit referencing agencies. According to one of the Commissioner’s blog published on the Privacy Commissioner for Personal Data in Hong Kong, TransUnion is the only credit reference agency that compiles the data of consumers in the region.
In order to create your credit report, TransUnion gets your credit details from credit companies, banks, lenders, and other financial institutions. Take note that this agency does not really care about your income or your assets. All it cares about is your credit information. So if you want to know anything about your credit behaviour, you can get that data from TransUnion.
We mentioned how credit scores measure your credit condition. It is not as complicated as you think. In fact, the rules are simple. If you have a high credit score, that is an indication of a healthy credit life and a disciplined behaviour when it comes to the use of credit. This description makes you a low-risk borrower in the eyes of creditors and lenders.
When you have a low credit score, that is an indication that you are a high-risk borrower. You use credit but you are not responsible with it.
According to the FAQ Section on the TransUnion site in Hong Kong, credit scores look at certain elements in your credit report.
This is basically a look at how you pay off your debts. If you make a lot of late payments, default on your loan, or you simply do not pay anything, that would pull your credit score down – often times, significantly.
Another factor that can affect your score is your balance. They call it credit utilization. The higher the ratio between your credit limit and balance, the more it can pull your credit score down. It is advisable that you keep your credit utilization to 30% of your limit. That means if you have a credit limit of HK$10,000, you need to keep your balance under HK$3,000 or less.
Credit account history.
This simply looks at the age of your credit accounts. The older a credit account is, the better it will be for your credit score.
Every time you apply for credit, the creditor or lender will pull out your credit report and calculate your credit score to determine if you are a responsible credit holder. This helps them make decisions about your credit application. Too much credit enquiries mean you are trying to apply to a lot of creditors or lenders at one time. That does not really say a lot about your credit behaviour except that you are risking stretching your payment capabilities thinly. At least, if it seems like you are borrowing too much money, that would indicate a not-to-smart credit behaviour.
Finally, any negative report in that proves you have made financial mistakes in the past (e.g. bankruptcies) could pull your credit score down as well.
According to the FAQ section of TransUnion, the credit scores in Hong Kong are usually taken from your credit account data, delinquency records, number of credit enquiries, credit history, and your public records.
Benefits of having a high credit rating
Of course, you may be wondering – what will a good credit score do for you? How will it help you reach your financial goals?
Here’s the thing. If someone is trying to borrow money from you, it is natural for you to ask them how they plan to pay you back. Although you want to believe when they say that they can afford to pay you back because they have a job and all that – you want to have proof right?
That is what credit scores do for creditors, lenders, and financial institutions. If they know that you are a responsible credit borrower, they will trust you with the loan because you have a good track record of paying back what you owe. But if you have a bad credit score, they can still lend you money – but they will surely take steps to protect their interests in the event that you decide to stop paying back the debt.
Here are some specific benefits that you will get if you have a great credit score:
Lower interest rate for future loans.
We mentioned that creditors and lenders would want to protect their interests when a high-risk borrower applies for credit. This is done through high-interest rates. They want to get as much from you as they possibly can by charging you with higher interest rates. If you are a good credit borrower, they will not feel the need to protect themselves. You will be given a lower interest rate – which will save you a lot of money on the interest amount that you will pay for the whole loan.
Power to negotiate credit terms.
Another benefit to having a great credit score in Hong Kong is the fact that you can negotiate better terms. For instance, if you have a credit card and you notice that the interest rate is high, you can call the card issuer and negotiate for a lower interest rate. If they see that your credit score is high because of a responsible payment behaviour, they would relent and give in to what you requested. This is especially true if you threaten them that you will look for another credit card with lower interest rates. Since you are a great client, they wouldn’t want to lose you.
Increase in financial opportunities.
Finally, you can also benefit from financial opportunities. You will be offered great financial products with the best terms and rewards. After all, you have a reputation of being a great credit borrower. Creditors and lenders would want to entice you to borrow from them. Not only that, you can borrow a business loan with a low-interest rate. That should help you build your dreams of being an entrepreneur.
There are other benefits when you have a high credit score. This is why you need to start paying close attention to how you use credit. You will never know how this can change your financial life and future for the better.
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