What Exactly is a Credit Score in Singapore?

These days, the term “credit score” is a hot topic. Let’s say you are a young Singaporean just starting out on your own. Let’s say you’re looking to buy your first car. You need a loan. The car dealer’s lender may ask you in that very first meeting, “How’s your credit? What’s your credit score?” If you don’t know what your credit score is, the discussion about borrowing money to buy that car may very well come to a screeching halt right then and there.

Don’t worry, you’re not alone. A large number of Singaporeans know little about credit scores. In this article, we’ll start with the basic definition. A credit score is a four-digit number that uses data from your credit report to determine your creditworthiness. That’s a big word for assessing how likely you are to repay debts in a timely manner.

Why is your credit score in Singapore important?

Your credit score can affect your ability to be granted any form of credit or any type of loan, be it applying for a business loan for your start-up, taking out a student loan for your child, or applying for a credit card with a good rebate programme.

Your credit score is used by potential lenders to determine whether or not to approve a loan to you. Your credit score can also determine the interest rate you’ll pay. A low credit score indicates to lenders that you may be an irresponsible borrower. A low score may result in your having to pay higher interest rates, which may inflate the total amount of repayment you will be making on loans. In addition, a low score may also result in low credit limits, which may in turn result in a high credit utilisation rate.

Maintaining a good credit history is a good investment of your time, energy and effort. A high credit score can actually save you thousands of dollars over the years, so don’t delay in improving your credit score if at all possible.

What are the factors that affect your credit score in Singapore?

Here are the different aspects that affect your credit score.

  1. Percentage of on-time payments

If you make your payments on time and in full, it tells future lenders that you are a responsible borrower. The percentage of on-time payments is typically one of the most heavily considered factors influencing your credit score. As such, even one or two non-payments or late payments can significantly decrease your credit rating.

  1. Credit utilisation ratio

This refers to the ratio between your debt and your credit. The ideal debt-to-credit ratio is somewhere between 1 and 20%. This indicates to potential lenders that you know how to responsibly use your credit, but that you are not financially dependent on it.

Take note that your income does not directly affect your credit score. Do not be too surprised if you still have difficulties getting approved for new loans or credit cards even if you have a low debt-to-income ratio. Even if you have a decent income but you are not able to manage your debt properly, it may result in a lower credit score.

  1. Average age of open credit lines

Another factor affecting your credit score is the average length of time your accounts have been open. In fact, it may be detrimental to your score to close the accounts of those old credit cards in your wallet. Aside from reducing your credit limit and effectively increasing your debt-to-credit ratio, you may also be decreasing the average age of your open credit lines when you close old accounts. Try to regularly make small purchases using those credit cards and pay them off immediately to keep them open and active.

  1. Total number of accounts

Your accounts include your credit cards, education loans, mortgages, car loans, personal loans and other types of loans. Numerous accounts on your report may prove to potential lenders that your current lenders have deemed you creditworthy.

5 Simple Ways to Clear and Manage Debts Effectively

  1. Derogatory marks on your credit report.

According to Money Smart, your credit report will show details regarding default, bankruptcy proceedings and debt management programs you have experienced. This information, if relevant, appears under the heading “Summary” at the top right section of your report.

The W code means that the member has defaulted. Unfortunately, this type of code cannot be removed from your credit report. The R and S codes mean that the bank has closed off the account, and that a restructuring of the outstanding balance has transpired. The H code means that there has been an involuntary closure of an account with an outstanding balance.

  1. Number of hard enquiries.

A hard enquiry takes place when a bank or financial institution requests to see your credit report in order to decide whether or not to grant you a loan. A large number of hard enquiries may indicate that you are applying for a lot of credit or loans but are not getting approved by many banks. To avoid unnecessary hard enquiries, apply only for credit or loans that you absolutely need. Thoroughly research the details of the credit or loan you are applying for and then realistically assess whether or not you have a good chance of being approved.

Read also: Clear Debts Fast: Getting Your Financial Situation in Order

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C.E.O @ The New Savvy
Anna Haotanto is passionate about finance, education, women empowerment and children’s issues. Anna has been featured in CNBC, Forbes, The Straits Times, Business Insider, INC and The Peak Singapore. She was nominated and selected for FORTUNE Most Powerful Women conference in 2016 (Asia) and 2015 (San Francisco, Next Gen). Anna has 10 years of experience in the financial sector and is currently a Director in Tera Capital. Her previous work experience includes positions at Citigroup, United Overseas Bank, a regional role in Business Monitor and a boutique private equity firm based in Shanghai. She graduated from Singapore Management University (Finance and Quantitative Finance).