If you are thinking of applying for a mortgage or any kind of personal loan, you may be wondering if your credit score is good
enough for you to qualify. Or you may have applied for a loan in the past and been told that your credit score needs improvement. Your credit score is determined through records of all your accounts across different banks, tracking your payment history to come up with a number. This number gives the banker an idea of how safe or risky it is to approve a loan for you. It is important that you have a good credit score regardless of whether you are applying for a loan in the immediate future. So what exactly does the bank look at while determining this number? Here are some of the major influencing factors.
1. Timely Bill Payments
Needless to say, your credit score is affected by whether or not you make timely bill payments and credit card payments. Missed deadlines are partial payments reflect badly on your credit score and gives the impression that you are a risky customer.
2. Number of Bank Accounts
Having far too many accounts with different banks indicates that you might be spreading yourself thin. The higher your number of bank accounts, the more liabilities you acquire. This increases your credit obligations and reduces your score.
3. Recent Transactions
Are your spending patterns consistent, or erratic? Erratic spending patterns and a recently history where you have made large transactions on your credit cards might be an alarming sign for the bank where you are applying for a loan. Customers with consistent spending patterns are strongly preferred.
4. Account History
If you have been a long-term customer with a solid reputation for repayment, your credit score is likely to be good. The
longer you stay loyal to your banking and credit service, better your chances of getting a loan. Here, too, consistency is an important factor.
5. Number of Credit Cards
While it might be tempting to take up all the attractive credit offers that come your way, these are a form of liability. The number of credit facilities you are currently using adds up to significant liability. Less available credit means a better chance at getting your loan approved.
6. Repeated Credit Applications
Every time you apply for credit and a financial institution accesses your history, the request is recorded. A higher number of applications means a higher number of requests to view your credit score, which indicates unreliability and reduces your chances of getting credit approval.
Improve your Credit Score
Needless to say, you cannot improve your credit score in a day. It is an accumulation of your past behaviour and requires consistent effort to turn around. Think of it as a lifestyle change! Luckily, there are multiple ways to build a good credit record, starting with evaluating your history and pinpointing where you might need to improve. Here are some helpful ways to get started.
1. Payment Reminders
Set reminders in advance if you are the kind of person who tends to miss payments simply because you forgot your due date. This is an easy fix, set your reminder to a few days before your due date to give you some time. Preferably, make payments in advance rather than waiting for the last minute.
2. Make a Plan to Pay off your Debts
Do you repeatedly transfer credit from one account to another? This habit might be keeping your credit score down. Get rid of the debt you have acquired instead of accumulating more. This is easier said than done, but a good starting point is to determine which of your credit facilities charges the maximum amount of interest, and getting rid of those debts first.
3. Analyse your Spending Patterns
This might seem very obvious, but it cannot be stressed enough. Mindful spending can save you money that you can use to pay
off your credit. A credit card owner must always think long term, because it can be very easy to make impulse purchases or spend more than you need on any given day. You might think you’ll worry about it later, but it adds up quicker than you think. Make easy swaps that will limit your overall expenditure.
4. Stay Well Below your Credit Card Limit
If you have been spending nearly the full extent of your credit card limits every month, consider limiting them to less than 30%. This reflects positively on your credit score, and if you think you will be spending more on your credit card in any given month, at least make a pre-payment. You might be paying your dues on time but reaching your limit every month is not perceived well.
5. Limit Credit Cards and Bank Accounts
Remove your liabilities! Weigh the benefits of every credit card you own, and get rid of the ones you don’t need. Do the same with bank accounts and close the ones that you are not using. Find a primary bank and stay loyal to it.
6. Don’t Apply for Credit Unnecessarily
Only apply for credit when you absolutely need it. Try to vary the types of credit you are utilising. For example, owning only credit cards is not a good sign. Find other sources of credit when you need them so that the banks know that you can handle different types of credit.
In Singapore, your record of the previous 12 months determines your credit score. So if you are worried about having a poor
score, don’t lose hope because you can start the process of turning it around right now. A good score makes you eligible for better insurance programs, lower interest rates on credit, and many other benefits you may not be aware of. Healthy financial habits will not only help your credit score, but will save you a lot of money over time. So be patient, consistent, and mindful. The process is a marathon rather than a sprint, but it eventually pays off. Literally.