Understanding How Debt Affects Your Credit Score

One of the biggest factors that affect your credit score is your debt. How you manage your debt has a direct effect on your credit score and consequently, on your ability to borrow money. It also has an effect on your ability to get a low insurance rate.

If you are interested in seeing your credit score, then you may inquire at the Credit Bureau at Singapore.

Take note that your income is not a factor in your credit score. Do not be too surprised if you still find it difficult to get 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, then your credit score may be too low.

Know the difference between Good Debt and Bad Debt.

Unsecured Debts

Unsecured debts refer to debts that are not secured by collateral properties. These include your credit cards and personal loans. Having a lot of unpaid debts, especially high credit card debts, can pull down your credit score. The calculation of your credit score takes into consideration your credit utilisation. This refers to the ratio between your credit card balance and your credit limit, which financial institutions report to the credit bureau.

The higher your credit card balance relative to your credit limit is, the lower your credit score gets. This means that it will be best to avoid maxing out your credit balances. Going over the limit is the worst that you can do.

The calculation of your credit score also takes into consideration your on-time payment percentage. Financial institutions report both your on-time payments and late payments to the credit bureau. Even just one late payment can negatively affect your credit health for months or even years. Aside from on-time payments, financial institutions will also report any increase or decrease in your personal loan balance.

If you default on your unsecured debt, the financial institution reports the account as past due. If the account remains delinquent for over 150 days, then it will be reported as charged-off. This means that the financial institution has already considered the debt as a loss. Delinquencies such as charge-offs have a serious effect on your credit score.

Secured Debts

Secured debts, as the name suggests, are debts secured by collateral properties. These include mortgage with your home as the collateral, and car loans with the car as the collateral.

If you default on your secured debt, the financial institution will seize your property, and report it to the credit bureau. Just like a charge-off for unsecured debts, the seizure can greatly pull down your credit score.

Fortunately, it is still possible to improve your credit score even after it dips too low. One way is too promptly meet your monthly repayment sums over a 12-month period. Another way is to get expert advice and support from a credit counsellor in Singapore.

Here’s how you can Take Account of Your Debts.