Credit score is a number that determines your creditworthiness using data from your credit report. Your credit score is taken into consideration when you go to a bank asking for a loan. It has a direct impact on your ability to get any loan – whether it is applying for a student loan, a business loan for starting a new organisation, or applying for a credit card.

Credit scores and your ratings

Your credit score directly impacts the interest rate that you will have to pay for car loans, credit cards and mortgages. A 100-point rise in your credit score can convert into thousands of dollars in savings for you over your lifetime.

Looking at your credit score, the bank can make a prediction on whether you will default on your payment in the future. To partially compensate for the possible losses, banks normally charge an annual percentage rate (APR). Some banks also offer credit cards with 0% APR which are quite popular among customers. However, there are other factors as well that influence what you may have to pay to use someone else’s money.

Here is a list of some other factors that banks consider when making a decision on granting a loan:

1. Ratio of monthly debts in comparison to income.
2. Magnitude of down payments on car and house.
3. Nature of credit card transactions and expenses.

Factors that affect your credit score in Singapore:

Hard enquiries

A hard enquiry occurs when a lender requests to view your credit report to determine whether or not to grant you a loan. Frequent hard enquiries may point to the fact that you are applying for number of loans, but are not getting any approvals.

Critical remarks on your credit report

In your credit report all the details about debt management programmes, bankruptcy proceedings and defaults that you have gone through will be mentioned. These figures appear under the section “Summary” in your report. If the details do not show you in a positive light, your credit score will be tarnished.

Credit utilisation ratio

Credit utilisation ratio denotes the ratio between debt and credit. Ideally your debt-to-credit ratio should lie somewhere between 1% and 20%. This gives an indication to banks that you are aware of how to use your credit responsibly.

Percentage of on-time payments

All your complete loan repayments in the past give an indication to banks that you are a reliable borrower. The proportion of on-time payments is normally the most important factor that impacts your credit score. Even a couple of late payments can considerably lower your credit score.

Lenders can use your credit score to decide if approving a loan to you will be the right decision or not. The interest amount that you will have to pay is also determined by your credit score. If you have a low credit score, lenders are likely to consider you an irresponsible borrower and may not agree to give you the loan.

Even if you manage to get a loan, a low credit score means that you will have to pay a higher interest amount. It will ultimately increase the total amount of repayment you will have to make on loans. Moreover, a low credit score may lead to low credit limits, which will result in a high credit utilisation rate.

Maintaining a decent credit history is a worthy investment of your effort, energy and time. A high credit score can truly help you save thousands of dollars, so do not make any delay in improving your credit score.

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