Credit score is often a rarely talked about topic in personal finance. Interestingly, the Monetary Authority of Singapore (MAS) has authorised only two credit bureaus to issue credit reports and credit scores. These are the Credit Bureau of Singapore, and DP Credit Bureau.
From the table below, we can see the range of credit scores assigned to an individual:
|Credit score||Risk grade||Probability of default|
|1911 to 2000||AA||≤ 0.27%|
|1844 to 1910||BB||0.27% to 0.67%|
|1825 to 1843||CC||0.67% to 0.88%|
|1813 to 1824||BB||0.88% to 1.03%|
|1782 to 1812||EE||1.03% to 1.58%|
|1755 to 1781||FF||1.58% to 2.28%|
|1724 to 1754||GG||2.28% to 3.48%|
|1000 to 1723||HH||3.48%|
If your score is nearer to 2000, you’re in the pink of financial health, with a low risk of default. If your credit score is closer to 1000, it means that you might be at higher risk of defaulting. But what benefits does a good credit score provide you?
Benefits of High Credit Score
1. Low Interest Rates on Credit Cards and Loans
The interest rate is one of the costs you pay for borrowing money and the interest rate you get is often directly proportional to your credit score. If you have a good credit score, you will almost always qualify for the best interest rates, as well as pay lower finance charges on credit card balances.
The less you pay in interest, the sooner you are able to pay off the debt. This means you will have more money for other expenses.
2. Better Chance for Credit Card and Loan Approval
Borrowers with a poor credit history typically avoid applying for a new credit card or loan, because they have been turned down previously. Banks and other financial institutions will deem you to have a higher chance of defaulting on your loan, so they would more often than not deny your application.
However, having an excellent credit score does not guarantee approval, because lenders still consider other factors, for instance, your income and outstanding debt. However, a good credit score increases your chances of being approved for new credit. In other words, you can apply for a loan or credit card with confidence.
3. Get Approved for Higher Limits
Your borrowing capacity is largely based on your income and your credit score. Even though the former might play a larger role, credit score is still an important factor in determining your loan ceiling.
One of the benefits of having a good credit score is that banks are willing to let you borrow more money because you have demonstrated that you pay back what you borrow on time. You may still get approved for some loans with a bad credit score, but the amount will definitely be more limited.
4. More Negotiating Power
A good credit score gives you leverage to negotiate a lower interest rate on a credit card or a new loan. This is important when it comes to refinancing your loans, as banks are more likely to acquiesce if you have proven yourself to be a responsible borrower.
However, if you have a low credit score, creditors are unlikely to budge on loan terms, and you will not have other credit offers or options.
5. Better Car Insurance Rates
For those who drive cars in Singapore, this might be an important point. Although the exact determinants of your premiums are not revealed to the public, insurance companies will often use information from your credit report and insurance history to develop your insurance risk score.
As such, they will penalise people who have low credit scores with higher insurance premiums. With a good credit score, you will typically pay less for car insurance than similar applicants with lower credit scores.
How to Improve Your Credit Rating?
As you can see, there are many benefits in keeping up a high credit score. But how does one go about doing that? Here are two of the most common ways people maximise their credit rating.
1. Pay All Your Dues on Time
Some credit cardholders think that it is quite alright to delay payments as long as the late payment fees are paid. However, this is not true. A delay beyond 30 days, regardless whether you pay any late payment fees, will put you in the delinquent category and over a period of time, this will hurt your credit score.
To avoid this problem, you can try keeping a note of all the dates on which you have repayment commitments. If you cannot pay a loan instalment on time, you should inform the financial institution before the date the payment is due, to see if they can grant any extensions.
2. Use Your Credit Cards Wisely
It is very easy to get carried away when you pay for your shopping with a credit card. The due date for payment might still be several weeks away and you might choose to pay the minimum sum and defer the remaining payments.
However, the careless spender will end up accumulating a large amount of credit card debt and consequently pay significant amounts as interest.
Instead of using your credit card in this manner, it is preferable to use it as a method of payment instead. When you receive your monthly statement, you should pay off the entire amount at once. Not only will your credit score remain intact, your credit card can reward you in many ways by earning attractive cashback or air miles.
In conclusion, maintaining a healthy credit score is extremely important, as it greatly increases the amount of credit you have access to, as well as decreases the amount of money in terms of interest you will pay each month. All of these ensure you are able to fund your next big ticket purchase, and not have to worry about where the money will be coming from.