Why you should get a credit card, and not just for the rewards

1. What is a credit score?

2. Factors that affect credit score

3. How to boost your credit score

4. How to obtain your credit report

1. What is a credit score?

Simply put, your credit score is an indication of how trustworthy you are when it comes to repaying loans. The lower your credit score, the more likely you are to default (not pay back) on your loans. Lenders are interested in how likely you are to default on your payments as they need to make an informed decision on whether you are creditworthy, as it in turns affects their profitability (if you are a high-risk individual, lenders may not be willing to grant you credit). The institution in charge of keeping track of your credit score is Credit Bureau Singapore (CBS). Banks, who we take loans from, provide data about how well we are repaying our loans to CBS and CBS compiles the data to form our credit score. CBS themselves do not make a judgement on whether we are loan-worthy, but instead just provides our repayment history to financial institutions who will make a judgement themselves on whether we are worthy of being granted a loan. With a higher credit score, you are more likely to be granted a loan and credit cards and may even be granted lower interest rates on your loans. Just like how bonds that have a higher probability of defaulting usually have a higher interest rate, individuals who have a higher chance of not paying back their loans may be charged a higher interest rate. A slighr incease in interest rates for a big ticket purchase like a house can cost you a large sum! Here is a table showing the credit score categories and the corresponding minimum and maximum probability of defaulting on your loan payments.

Source: Credit Bureau Singapore

Your payment history is compiled into something called a credit report, which has the following data:

• Number of queries made, i.e. the number of financial institutions requesting to take a look at your credit report to determine whether you are worthy of being given a loan.

• Credit card debt repayment for previous 12 months

• Any defaults on payments which remain for 7 years upon being uploaded to the report

• Records of bankruptcy which will remain for 5 years after being discharged bankrupt

• Sum of all your credit limits (Your credit cards will have a credit limit, the maximum you can spend on the card)

• Sum of your debt balances

As you can see, some mistakes can stay with you for a long time, so you need to be disciplined with your repayments.

2. Factors that affect credit score

• Utilisation pattern: This refers to how you are using your available credit. It is recommended that you keep your utilisation pattern consistent every month, i.e. do not have sudden periods where you utilise much more credit than usual. For example, if you usually only spend 30% of your available credit every month and there is a month where you suddenly utilise 70% of your credit limit, it may raise some red flags. It is also recommended that you keep your utilisation rates low, around 30%-50%, as high utilisation rates may suggest that you take on higher risk with your credit. What I personally do is I only use my credit card for a fixed set of bills that I will incur every month, e.g. my mobile bill, and I charge my remaining expenses on my debit card. This way I get both low and consistent utilisation rates.

• Recent credit: If you have a sudden increase in the amount of credit you have available, lenders may believe that you are stretching yourself beyond your means. Thus, you should not apply for many credit cards / loans within a short span of time.

• Account delinquency (late payment) data: If you were late to pay back your credit card bills or loans (even a day late), it will leave a scar on your credit report. Thus, do whatever it takes to make sure you are not late on your payments. I personally set a fixed date and time to pay my credit card bill and set a recurring reminder on my phone. Making payments that are not in full will also negatively affect your score. Furthermore, credit card debts tend to have absurdly high interest rates (20%), so you do not want to incur any credit card debt!

• Credit account history: The longer your credit history, the more favourable lenders view you. Thus, if you are young, please use this to your advantage! You can get a credit card as early as 18 (if you’re below 21 you will need parents’ approval). You can look out for student / no minimum annual income requirement credit cards. I personally have a Maybank eVibes credit card as I am still a student and do not meet minimum income requirements for other credit cards (most credit cards have a minimum incomer requirement of 30k/year). The Maybank eVibes credit card has a credit limit of $500 and a cashback rate of 1%.

• Enquiry activity: This refers to the number of new application enquiries. Each time a lender requests for your credit report indicates an enquiry on your credit report. Like recent credit, having too many enquiries can indicate to lenders that you are trying to undertake debt that is beyond your means. Thus, you should not apply for too many credit cards within a short span of time.

Here is a summary of the factors:

Source: ValueChampion Singapore

3. How to boost your credit score

• If you are going to be late for repayment for any reason, do reach out to your creditors early enough and explain the reason behind why you may not be able to pay your bill in time. Ask them what you can do to avoid the late payment entry on your credit report.

• Verify any inaccuracies in your report. I’ll explain how to get your credit report in section 4. If you do see any inaccuracies, do dispute the mistake with supporting evidence with the bureau.

• Make your payments on time, and in full. I’ve explained how late payments can negatively affect your score in section 2.

• Limit your sources of credit, so that you can manage them easily. Having multiple credit cards or personal loans can make it difficult to track your commitments, increasing the chance that you may default on your payments.

• If you are not incurring any fees on unused credit cards, do not close them. Closing them will decrease your available credit which will increase your credit utilisation rates.

• Get a credit card as early in life as possible!

4. How to view your credit report

When you are applying for a new credit facility with any members of CBS, you can request for a free copy of your credit report. Alternatively, you can reach out to CBS straight and buy your credit report for $6.42 over here: https://www.creditbureau.com.sg/buy-my-credit-report.html. HSBC is also having a promotion with CBS where they sponsor your credit report (valid till 30 April 2021), but the downside is you are consenting to providing your information to HSBC to reach out to you for marketing purposes. Here is a list of members with CBS:

• American Express

• DBS

• Citibank Singapore

• HSBC

• Maybank

• OCBC Bank

• Standard Charted Bank

• UOB Bank

• Diners Club Singapore

• Bank of China

• Hong Leong Finance

• RHB Bank Berhad

• Sing Investments & Finance

• Singapura Finance

• State Bank of India, Singapore

• The Bank of East Asia, Singapore Branch

• CIMB Bank

• Bank Negara Indonesia

• BNP Paribas

• UCO Bank

• ICBC Bank

• Indian Overseas Bank

• HL Bank

• Credit Suisse, Singapore Branch

• Bank of Singapore

• Sumitomo Mitsui Banking Corporation

• ABN AMRO Bank NV (Singapore)

• HSBC

• LGT Bank

Cover Image: Forbes