How is your credit score calculated? More importantly, how do you make sure that it's in the best shape possible?
Not to mention, if you are looking for a career in finance, your credit score is now more important than ever. The Monetary Authority of Singapore (MAS) has announced at the end of November 2019 that credit checks for employees and potential hires by financial institutions are appropriate.
Knowing your credit score is key to being financially healthy. There will come a point in time in most Singaporeans' lives when taking a bank loan is necessary. The most common example is a home loan, car loan, business or education loan. A credit risk grade of AA makes it easy to qualify for such loans. When a large amount of cash is needed during an emergency, personal loans can also go a long way.
Those who cannot maintain a good credit score often find themselves deprived of these essential financial products. Here's how to improve your credit risk score and get it to AA rating, the highest possible credit grade.
How is your credit score determined?
Your credit score in Singapore is determined by a proprietary algorithm that tracks your use of credit. Any Singaporean can obtain a credit report (which shows their credit grade) from the Credit Bureau of Singapore (CBS) for a fee of $6.
|Rating||Score||Probability of Default|
|AA||1911 – 2000||between <= 0.27%|
|BB||1844 – 1910||between 0.27% to 0.67%|
|CC||1825 – 1843||between 0.67% to 0.88%|
|DD||1813 – 1824||between 0.88% to 1.03%|
|EE||1782 – 1812||between 1.03% to 1.58%|
|FF||1755 – 1781||between 1.58% to 2.28%|
|GG||1724 – 1754||between 2.28% to 3.48%|
|HH||1000 – 1723||between >= 3.48%|
Source: Credit Bureau Singapore
The highest possible credit score risk grade is AA. Grades of B or C indicate delinquency or late repayments, and grades of D or lower are often caused by defaults (bank was forced to write off the loan).
Non-Scored Risk Grades
|HX||Public Record (with or without inquiry / with or without trade).
This means there could be a past and/or existing writ of summons/bankruptcy record filed against you.
|HZ||Currently 90 + / write off with outstanding balance greater than or equals to $300.
An HZ risk grade is accorded when you have outstanding balances >=$300 and have accounts loaded in any of the following status: D: 90 or more days past due F: closed with outstanding balance H: involuntary closure with outstanding/surrender of security with outstanding balance R: closed, restructured loan S: closed, negotiated settlement prior to charge off W: closed as default record by Member.
|GX||Inquiry record only (no Public Records / No Trades).
This means there is only self-enquiries and/or enquiries made by banks when there is no credit file.
|BX||Only inactive trade, “Other”, Bridging Loan, or Margin Trading account present.
This means either all your accounts are closed (with or without balance) or you only have bridging loan or margin trading account or accounts that are loaded as ‘Others’ by your lender.
|CX||Insufficient Credit Activity.
This means there is ‘very limited’ information such as Credit Applications and/or Accounts Status History as such, unable to derive a Score.
In addition to the credit grades, there are some "ungraded" credit scores. If you have no history of using loans or credit cards, for example, you will have an ungraded score of "Cx". Persons who are currently declared bankrupt, or who are facing litigation, may also lack a credit grade (their credit report will indicate their situation).
Why does a good credit score in Singapore matter?
For most loans above $500*, banks will use your credit score to determine your loan quantum, or how much they are willing to lend you. Unlike some other countries, banks in Singapore seldom vary the interest rate based on your credit grade. If you have bad credit, you will either be given a smaller loan or be rejected.
This is why it’s important to keep your credit score healthy. The worse it is, the less you can borrow for a car, house, education or starting a business. You get the picture.
In some cases, a prospective employer will ask to see your credit score when you apply for a job. Some employers (particularly in the finance industry) will turn down applicants with bad credit.
(*Most banks and financial Institutions don't check your credit grade for loans of $500 or below.)
How to improve your credit score risk grade in Singapore
To bring up your credit score to an AA (or close to it), you should:
- Always repay loans on time
- Avoid making multiple loan enquiries in a short time
- Don't have too many credit facilities open
- Never default on your loans
- Take and repay a loan to repair damaged credit
1. Always repay loans on time
By the time you receive a second or third letter reminding you of late payment, your credit score would have dropped. This will happen whether or not the bank waives lay payment fines.
For credit cards, always repay at least the minimum sum, before the billing cycle ends. At SingSaver, we recommend that credit card bills be repaid in full every month in order to save on interest repayments.
For loans such as mortgages or personal instalment loans, inform your bank early if you think you may miss payments. Alternatively, speak to a credit counsellor. It is possible that the bank will work out a repayment scheme (debt restructuring), which will do less damage to your credit rating.
2. Avoid multiple loan enquiries in quick succession
If you make four or five loan applications within a short span (e.g. a single month) of time, you could be identified as 'credit hungry'. This is typical behaviour for someone in financial difficulty, such as someone who has just been retrenched or is in debt.
Spread out your loan applications whenever possible. If you're trying to find a cheaper loan, use the comparison tools on SingSaver to compare offers with the lowest interest rate. Don't apply for multiple loans and enquiries all at once.
3. Limit number of open credit facilities
In general, avoid having more than four to five credit facilities (personal lines of credit, credit cards, personal loans, and so forth). At any rate, it's not advisable to hold six or seven credit cards or credit lines. You are likely to get confused by the various billing cycles and miss payments.
Always close off credit cards you no longer use, which will also save you paying the annual fee. For personal lines of credit, there is little reason to have more than one. If you find a credit line with a lower interest rate, close your current credit line and switch to the cheaper one.
4. Never default on loans
If you default on a loan, it will appear on your credit report indefinitely. A single major default can make it impossible to ever get a credit card, line of credit, or home loan. If you cannot make repayment, always seek credit counselling and have your debt restructured. While it will lower your credit grade, it is better than defaulting.
In addition, defaulting will result in legal action if you have the money but simply refuse to make repayment.
5. Meet short-term loan repayments to repair damaged credit
If you have a bad credit grade, the easiest way to repair it is by settling in full any short-term or small loans ($1,000 or less). Over time, this will go a long way to repairing your damaged credit once the bureau sees you are making repayments on time and in full.
If you currently have a credit grade of B or under, start doing this a year or two before you apply for major loans, such as a home loan. This could bring you the coveted AA rating by the time you send in your application.
Read these next:
7 Mistakes That Ruin Your Credit Score in Singapore
Good Debt vs Bad Debt: What Do You Owe?
Unpaid Credit Card Bills? Here’s How A Balance Transfer Can Help
Does Playing the Miles Game Affect Your Credit Score?
Best Loans to Help Improve Bad Credit Score in Singapore
By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men's Health, Her World, Esquire, and Yahoo! Finance.