The financial mistakes you made in the past can come back and haunt you in the form of your credit score. Here are five ways a bad credit score can affect your future.
Practically every adult has something called a credit score. A credit score is a number that indicates how reliable you are as a borrower and how likely you are to repay your loans on time.
You may not be aware of it, but financial institutions (and your next employer) can and do refer to your credit score. Your credit score actually has hidden powers and it can either help or hinder you in life.
Wait, what is a credit score?
Unbeknownst to most of us, the Credit Bureau of Singapore (CBS) keeps records of people in Singapore who have any sort of borrowing history, even if it’s just a credit card.
The CBS tracks your borrowing behaviour, payment history, and even your credit cards/loan application history — all data that reveals your creditworthiness. The result of this evaluation is a four-digit credit score ranging from 1,000 to 2,000.
Scoring full marks of 2000 means you are an extremely credible borrower and faithfully repay all your bills and personal loans punctually. You have a close to 0% chance of defaulting on your loans.
On the other hand, a bad credit score that falls within 1000 to 1723 could be the result of missed payments, late/incomplete payments, and/or defaulting on your loans. Your assessed risk of defaulting is anywhere from 3.46% to 100%. You can imagine how bad that looks to anyone who checks on your credit score!
Credit scores are not published, so to find out what yours is, you’ll need to request a credit report. You can request it for free from HSBC, or when you sign up for a new credit card or loan from any provider. Otherwise, it costs $6.42 to get a copy from the Credit Bureau of Singapore directly.
It is definitely a good idea to know your credit score, because that number can affect your life in the following ways.
1. Buying a home
A bad credit score could prevent you from buying the home of your dreams.
Why? Because home loan providers will want to look at your credit score before agreeing to lend you the money for your mortgage. After all, we’re talking about a very substantial sum of money.
If you’re applying for an HDB loan, HDB will assess your credit-worthiness as part of the HDB Loan Eligibility (HLE) process. Unless you are employed with monthly CPF contributions, you will most likely need to submit your CBS credit report when applying for the HLE letter.
For bank loans, the banks will check your credit score with CBS before agreeing to lend you the money. If you have a poor credit score, your loan may not be approved. Or you may not get the full amount you hope to borrow.
2. Renting a place
All right, let’s say you have no plans to buy a home at the moment. But your credit score can affect your chances of renting, too.
Landlords can and do request documents such as your credit report and letter of employment to make sure you won’t just run away without paying the rent. Some conduct background checks on their prospective tenants’ finances too.
Even if you manage to find a landlord who is okay with your less-than-stellar track record, this arrangement might not last forever.
All other things being equal, most landlords would prefer to rent to a more credible tenant. Don’t give him or her the chance to terminate the agreement.
3. Getting a job
Yes, a bad credit score can actually stand between you and your dream job!
Even though employers pay you — not the other way around — some look at your credit score as part of their background check before hiring you.
Employers do invest capital, resources and time on their workers, so it’s only natural they want employees whom they can trust to be responsible. Your credit report is evidence of that.
A clean credit report is particularly important in sectors like the public service and finance. In fact, the Monetary Authority of Singapore has made it mandatory for financial institutions to run credit checks on their employees.
4. Getting a loan
Of course, a bad credit score can jeopardise your chances of any kind of loan in the future.
With a bad credit score, it’s difficult to convince banks to lend any money to you. Your credit card applications may be rejected, leaving you with no choice but to use a debit card or secured credit card (which requires a big lump sum deposit).
You might have better luck with personal loans. But still, after assessing your risk of defaulting, banks can decide to quote you a higher interest rate than the advertised one. Or they may not lend you the full amount you wanted.
We’re not just talking about frivolous wants, here. There’s a chance you might need cash for a car, renovation, education, or medical emergency in the future. Being denied such a loan would leave you in a financial pickle.
5. Having a relationship
We hope your significant other does not actually ask for a copy of your CBS credit report. Still, your current credit score may have an intangible impact on your future relationships.
When relationships get serious and you start thinking about building a life together, the topic of finances is bound to come up. That’s only natural since many couples’ finances get merged to some extent, especially after getting married and living together.
Some partners are willing to overlook a bad financial past, while for others, it could be a source of long-term contention.
If your financial issues remain unresolved, your spouse might worry about being saddled with your debt or about you recklessly spending from your joint account. This kind of distrust is no basis for a healthy relationship.
It’s never too late to fix your credit score
We’ve seen how a bad credit score can impact your chances of getting a job, a home and even a partner.
But the good news is that you can start improving your credit score in a matter of months.
The Credit Bureau calculates your score based on 12 months of repayment history, so you have a year to clean up your act. Start making prompt and full repayments and you should see a big difference in your credit score after a year.
If you have multiple debts to tackle, prioritise short-term, high-interest, and/or small loans first. Cancel your unused credit cards/facilities in the meantime. If you have trouble with your larger loans, you can speak to a credit counsellor about how to start tackling your debt.
For those who have sworn off all credit cards and loans — good on you, but this may cause your credit score to stagnate.
You’ll need to start borrowing and repaying again to build up your track record. The easiest way to do this is with a credit card. Compare and choose a suitable credit card on SingSaver, spend modestly on it, and repay your bills in full and on time each month.
Read these next:
5 Ways to Get the Highest Credit Score in Singapore
Best Loans to Help Improve Bad Credit Score in Singapore (2020)
How to Get a Personal Loan in Singapore With a Bad Credit Score
Credit Card Housekeeping: 3 Reasons To Cancel Unused Credit Cards
Balance Transfer vs Personal Loan: Which is Better for You?