5 foolproof ways to improve your credit score

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At some point in most Singaporeans' lives, they would inevitably have to take out a bank loan — be it to buy a house, a car, set up a business, pay for their higher education or their kids' education.

In times of emergency when a large amount of cash is required, personal loans may also be necessary.

Having an AA grade credit risk makes it easier for one to qualify for such loans when needed. Not having a good credit score can even deprive one of those financial products.

So how do you get that AA grade credit score? Read on to find out.

How is credit score determined?

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In Singapore, one's credit score is determined by an algorithm that tracks your credit usage.

For a fee of $6, any Singaporean can obtain their credit report reflecting their credit grade) from the Credit Bureau of Singapore (CBS).

The credit score risk grades are as below.

Source: Credit Bureau Singapore
Rating Score Probability of Default
AA 1911 - 2000 < 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 > 3.48%

AA is the highest possible credit score risk grade, while BB or CC indicate late repayments or delinquency, and DD or lower indicate defaults (where the bank was forced to write off the loan).

There are also ungraded credit scores for persons who have no history of taking loans or using credit cards, or those who are declared bankrupt.

The former will have an ungraded score of Cx, while the latter may lack a credit grade (and a credit report that indicates their situation).

Why do we need a good credit score in Singapore?

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Simply put, your credit score affects your loan eligibility. For most loans above $500, banks will look at your credit score to determine how much they are willing to lend you and whether to approve the loan application.

Applicants with higher credit scores are usually offered larger loans or more favourable interest rates. Conversely, those with a lower credit score may have higher interest rates under tighter conditions, given a smaller loan or even not at all.

Therefore, keeping your credit score healthy will open the door to bigger loans for a house, a car, and more.

Plus, if you are seeking a career in finance, your credit score can also affect your chances of getting hired.

The Monetary Authority of Singapore (MAS) has deemed credit checks for employees and potential hires by financial institutions as appropriate, so some employers (especially those in the finance industry) can turn down job applicants with poor credit grades.

How to improve your credit score

There are a few things you can do to raise your credit grade to an AA (or at least something close to that).

1. Don't make multiple loan enquiries in a short period of time

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Every time you apply for a loan, an enquiry is filed.

Making many enquiries within a short span of time will lower your credit score and you would appear to be 'credit hungry' and taking on a lot of debt, which is typical behaviour for someone in financial difficulty.

Therefore, spread out your loan applications and look for cheaper loans wherever possible.

2. Minimise number of open credit facilities

Generally, having more than four or five credit facilities (e.g. credit cards, personal loans, personal lines of credit, etc) is a sign that you are credit hungry and are in more debt.

It is also not advisable to hold more than six to seven credit lines or credit cards or credit lines as you are more likely to miss payments when confused by the different billing cycles.

Be sure to close off credit cards that you no longer use (it can also help you save on the annual fee) and switch to credit lines with lower interest rates wherever possible.

3. Always repay loans on time

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Late payments will most certainly reduce your credit score, as it indicates that you are prone to debt and spending beyond your means.

By the time you receive the second or third late-payment letter, your credit score would already have dropped, regardless of whether the bank waives your late-payment fine.

Plus, if you pay just the minimum amount every month, the interest on the balance can snowball, so aim to make your credit card payment in full before the end of the billing cycle each month.

If you think that you might miss payments, be sure to inform your bank ahead of time, particularly for personal loans or mortgages.

You can also speak with a credit counsellor to restructure your debt repayment scheme and minimise the damage to your credit rating.

4. Never default on loans

Not only will a loan default stay on your credit report, a single major default can even make it impossible for you to get a credit card, home loan, personal loan, etc.

If you cannot pay off your loans, try to have your debt restructured. Even though that will lower your credit grade, it still beats defaulting, which may even result in legal action.

It might also be a good idea to seek credit counselling to build financial resilience and work with a debt advisor to repay your loans.

5. Repay short-term loans to repair damaged credit

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If you already have a poor credit score (BB or below), the best way to fix that is by settling any small ($1,000 or less) or short-term loans in full.

Showing the credit bureau that you're making an effort to make repayments in full and on time can help to repair your damaged credit.

Do this at least a year before applying for major loans (e.g. car or home loan) and you might be able to raise your credit grade to AA by the time you apply for the new loan.

To maintain or improve your credit score, always spend within your limits, practice good loan habits, and never overextend yourself.

Need a loan? If your credit score is up to par, here are some of the best personal loans, home loans, and car loans you can qualify for.

You can also look into debt consolidation plans to help to manage your debt better.

ALSO READ: 6 reasons why your credit score is bad

This article was first published in ValueChampion.