Credit history is a record of an individual’s payment behaviour that reflects his or her ability to repay a loan. Credit history is one of the critical factors used in credit scoring, and is employed by lending institutions as a qualifier for new loans.
As most lenders will check your credit file to assess your creditworthiness prior to making a decision, a good credit repayment history will make it easier for you to obtain credit and to qualify for the big ticket items such as taking out a mortgage, planning a wedding, qualifying for a car loan and building up for retirement. You cannot build your credit history if you do not start having any credit.
Here are some tips to build a positive credit history, step by step:
1. Get a credit card
Signing up for a credit card will be the easiest alternative to start building up your credit history. Credit cards are a valuable stepping stone to measuring and tracking your credit and financial progress over time. How you charge purchases to your credit card and pay off your credit card debt every month will determine your credit standing and show how much of a credit risk you are. Paying your credit card balances in full every month helps you to maintain your credit rating and build up a good credit history. This will enable you to use credit to work harder for you, rather than becoming a slave to credit. Here are the other tips to build up a good credit history:
- Pay your bills on time: Where possible, always try to pay in full as rollover/outstanding balances will be charged at 24% p.a. Consider payment via GIRO to ensure payments are not late. Note: Default records stay on your credit report for 3 years upon full or negotiated settlement while bankruptcy data is retained for 5 years from the date of discharge from bankruptcy.
- Limit the amount of cards: More cards and higher credit limits could trick you into spending more. If you are not careful, you could end up overspending. Also, this increases the odds of not paying one of your credit bills on time. Cancel any unused cards – It is more manageable to keep track of 2 credit cards than 10. Don’t apply for lots of credit at once – This sends a signal to creditors that you are desperate for credit and are a risk to lend to.
2. Watch your spending: the Debt-to-Income Ratio
Yes, we just told you to get credit by any means possible. But, you do not simply want to whip out your cards to pay for everything. A rule of thumb to determine how much credit you can take on is to compare how much you owe with how much you earn. A simple calculation based on these two factors is called the Debt-to-Income ratio. Here is an example of how the Debt-to-Income ratio is calculated:
|Calculating your Debt-to-Income Ratio|
|Monthly debt repayments||S$800|
|Monthly take-home pay||S$3,200|
|Debt-to-income ratio||S$800/S$3200 = 0.25|
With the above monthly expenses and take-home pay, you would have a debt-to-income of 25%. It is important to have a better understanding of your financial situation in order to meet your financial obligations. Commit to writing every cent spent. It is at this point that you can identify any leaks and use your money properly. Avoid spending up to your full credit limit; reserve a percentage for emergencies. Do not buy on impulse just because you can place your purchase on credit. Making a habit of watching the debt-to-credit ratio is a good habit to cultivate. You do not want to increase your debt load.
3. Get a copy of your credit report from Credit Bureau Singapore (CBS)
A copy of your credit bureau report from CBS is the next step that you can take on your road to financial independence. It is important to review your credit report half yearly and check your credit history. The credit report will contain a record of your credit payment history compiled from different credit providers that provides valuable insights into your financial history, knowledge and repayment behaviour. This encompasses a comprehensive assessment of your aggregate credit limits and outstanding balances under your credit cards or other facilities across financial institutions into your credit file. You become empowered to make better informed decisions for future applications of credit facilities.