True Story: How I Raised My Credit Score From DD To AA Grade In 6 Months
Closed borders and grounded flights – no thanks to the coronavirus pandemic – spelled disaster for the tourism industry. Needless to say, as a tour agency manager, I was not spared. Having been put on no-pay leave for what seemed like an indefinite period, I ended up struggling to repay my monthly credit card and loan instalments on time.
The result? A terrible credit score (1830, squarely in the ‘DD’ range), which negatively impacted my chances of taking up a renovation loan for my home and an education loan for my daughter. In a desperate attempt to improve my credit score, I scoured through online resources on the topic and sought additional guidance from local banks. Thankfully, after 6 months of hard financial work, I was able to turn around my credit score to an impressive 1920, an AA rating. Here are 5 tips that I’ve learned from my experience.
What is a credit score?
A credit score is a 4-digit number based on your past payment history and indicates the likelihood of you defaulting your loans. The highest score on the scale is 2,000, while the lowest score is 1,000 – and anything between 1,000 to 1,723 would count as a bad credit rating. In Singapore, only 2 credit bureaus issue credit reports and scores: the Credit Bureau of Singapore (more common) and the Experian Credit Bureau.
How to check credit score in Singapore
| Score Range | Risk Grade | Probability of Default (Minimum)/% | Probability of Default (Maximum)/% |
|---|---|---|---|
| 1911-2000 | AA | 0.00 | 0.27 |
| 1844-1910 | BB | 0.27 | 0.67 |
| 1825-1843 | CC | 0.67 | 0.88 |
| 1813-1824 | DD | 0.88 | 1.03 |
| 1782-1812 | EE | 1.03 | 1.58 |
| 1755-1781 | FF | 1.58 | 2.28 |
| 1721-1754 | GG | 2.28 | 3.46 |
| 1000-1723 | HH | 3.46 | 100.00 |
Tip 1: A balance transfer loan can make monthly credit card payments more manageable
A missed credit card bill payment will have the longest-lasting negative impact on your credit score. Without a steady employment income stream, keeping up with the usual 25 – 29% interest rates on my outstanding credit card debt would have been impossible. To prevent further damage to my credit score – and make payments more manageable – I opted for a balance transfer loan (with an initial interest rate of 0%), which allowed me to consolidate my debt to one account.
I serviced my monthly loan payments with a part-time job for 3 months with approval from my employer. I continued paying the monthly instalments even after my no-pay leave ended and could pay off the loan in full. Doing so helped to shore up my ‘reputation’ for paying on time.
How does a balance transfer loan work?
| Starting Debt | 12-Mth Total Credit Card Payment (25%) | 12-Mth Total Balance Transfer Loan Payment | Difference |
|---|---|---|---|
| 3,000 | 3,378 | 3,000 | 378 |
| 5,000 | 5,631 | 5,000 | 631 |
| 10,000 | 11,262 | 10,000 | 1,262 |
Tip 2: Consider a debt consolidation loan
While this one didn’t apply to me specifically, I found out that there is also the option of a debt consolidation loan, which streamlines monthly payments into 1 payment. The set interest rate of 3.80% to 4.58% per year could help make monthly interest rate payments more manageable.
Tip 3: Apply for new credit accounts as needed
Banks consider the number of credit facilities an account holder has as liabilities. To my despair, I realised that I was holding on to 7 credit cards – even though I only used 2 in my daily life. So, I closed 5 of them. I also don’t plan on applying for new credit facilities, unless I see one with an attractive signup promotion or a better interest rate.
Tip 4: Keep loan application inquiries to a minimum
When you contact several banks or financial institutions within a matter of days, the impression you create is that you’re desperate for funds. Limiting your inquiries to the bare minimum will help maintain your credit score. After learning this, I made sure to read up on all the information available on financial products in Singapore before sending out any inquiries – which I made sure to spread it out over a few months.
Tip 5: Allow sufficient time to improve your credit score
It is entirely possible for you to ‘erase’ a bad credit history. Of course, the process will take time – but it’s worth it. If you’re struggling with a bad credit score yourself, don’t worry. Here’s what you’re going to do: look into lowering your monthly interest rates so you can keep up with payments, close off any unnecessary credit facilities, and keep loan application inquiries to a minimum. In the meantime, you can also take steps to grow your savings (e.g. with a high-yield savings account). It also never hurts to have a ‘rainy day’ fund for the future.