6 reasons why your credit score is bad

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Most of us will never think about our credit score until our credit card application or home loan gets rejected.

"Credit score? Does Singapore have credit score system?" Yes, we have credit score ratings in Singapore too. It's not an American reality television thing.

"But I've never seen my credit score before."

Well, that's a good thing.

If you've been able to apply for any credit card you want, take up loans to finance the Singaporean dream - condo, COE, and car - without any hiccups, give yourself a pat on your back!

All of this was possible because of your financial discipline. You basically managed your finances and credit well.

1. Consequences of bad credit score

Imagine one day, you decided to be lazy and stopped paying your bills on time. You'll end up with a bad credit score.

What are the consequences of a bad credit score? Since you're a high-risk (won't pay up) customer, banks will be wary of you. Some expected side effects in Singapore include:

  • Taking up a car loan will become a challenge
  • You might find it difficult to refinance your home loan to lower interest rates*

2. I missed a repayment, will I get a bad credit score?

If you genuinely missed a home loan repayment because you got Covid-19 while travelling, don't fret.

The deterioration of your credit score does not take place overnight.

A missed payment or two may not affect your credit score. However, you will incur late payment fees.

If you have a good and long-standing banking relationship with your bank, you can call them up, explain your situation, and get them to waive the late payment fees.

Nice hor, but don't try to cheat the system. Surely the people working at the banks have seen enough and can tell if you're not able to pay up.

3. I have a bad credit score. What to do?

However, if you currently have a poor credit score, do look back at the year past and how you may have mismanaged your finances, missed your credit card bills, and any other loan repayments.

Also, take some time to talk to a friend about your spending habits, motivations, and relationship with money and finances.

Here are the six most common reasons why Singaporeans have bad credit scores. These may seem like common knowledge at first sight, but if you're lost in your bad credit loop, do audit these possible causes one by one:

4. Credit cards: Enticed by promotions & rewards

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As consumers, we often fall prey to marketing communications from brands.

We apply for more credit cards than what we need just because the ongoing promotion is giving a pretty cool item away for free. Eventually, we realise we never needed that second or third credit card.

In a bid to meet the minimum spend requirements, we buy things we don't need. (Don't mistake that for a Moneysmart person who knows how to optimise his or her necessary household expenditure with credit card welcome bonuses!)

Money spent thoughtlessly can snowball into significant expenses which burn a hole in your pocket.

If you're new to the credit card game, first identify your baseline monthly expenditure, your lifestyle needs and wants.

5. Credit cards: Not prioritising credit card bills

Bought that OSIM massage chair or SecretLab office chair on impulse? Feeling great, and enjoying it after work every day?

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Then, somehow, you forgot about the payment and dumped it on the back burner.

By the time your credit card bill is due, the chair's payment now feels like a deadweight burden.

How to deal with this? By keeping track of your cash flow.

If you want to play the credit card game (earn air miles, cash back, or reward points), the golden rule is to always have surplus cash on hand to pay off your credit card bill in full.

Many of us only pay the minimum amount due on our credit cards. Please ah, don't do that. That's your highway to a lifetime of poor credit management.

6. Credit cards: Stagger your expenses

Yay, new billing cycle. Time to spend!

If that's you. Your personality type is probably: Overspend.

Always stagger your expenses. People tend to overspend in payday week and struggle when unexpected expenses crop up later in the month.

It could be your child falling ill suddenly, medical expenses, a friend or colleague's baby shower, a wedding red packet, or your microwave oven malfunctioning.

Any of these occasions can easily bust your credit card limit and affect your bill payment.

If you're prone to overspending. Try giving yourself a weekly allowance limit and stick to it. This will give you buffer to spend on emergency occasions, or better still - to save whatever unused!

7. Credit cards: Too many credit cards

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We all love the perks of signing up for new credit cards, but be careful of old credit cards sitting in your wallet.

If you are done with a credit card, don't leave it idle. Credit card annual fees that you forgot to pay do accrue late payment fees and interest.

These unpaid fees can come back to haunt you and your credit score.

Always schedule a credit card housekeeping day. Cancel all unused cards. Also, holding many credit cards to your name can affect your credit score - because that can mean you have higher need for credit!

8. Credit cards: Spending beyond your means

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Here's a universal truth: It's easier to burst any budget than to keep to it.

If you're susceptible to online shopping or the wonderful world of Lazada, it will be helpful and realistic to have a realistic monthly shopping budget.

No shame here at all, we all have our vices and things we enjoy spending on. You'd rather have it in control and accounted for.

If you have big ticket items to buy, spread the purchases out instead of a massive order. Also, set a realistic credit limit on your credit card (a comfortable amount depending on your monthly salary).

9. Overcommitting to home loans

It is every Singaporean's dream to own a private property.

While the property cooling measures have kicked in to keep the Total Debt Servicing Ratio (TDSR) at 55 per cent of the borrower's monthly income, it is important to understand your own financial status before making the big splurge.

Like insurance, a home loan is a long term commitment. But unlike insurance, a home loan cannot be terminated unless you dispose it (with Seller Stamp Duty within the first three years). Are you willing to commit to big instalment repayments every month for the many years to come?

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Which do you prioritise - the type of roof you live under or the number of vacations you get to enjoy a year?

If you seek to globe-trot lavishly, then it is advisable to keep your fixed home loan repayments low so that you have the disposable income to live the experiences you desire.

If you have commitments outside of the TDSR such as ageing parents and children's childcare and tuition fees to maintain, then it is prudent to commit lesser than the loan amount you qualify for.

With a comfortable monthly repayment, any home loan interest rate surge (like what we are currently facing) would still keep you in good stead. This helps you to avoid late mortgage payments or restructuring of debts which will bring down your credit score.

Spiralling into debts can be difficult to reverse. It can lead to rejected loan applications or even job applications*. Once your credit score is poor, it will take at least six months to regain your credit standing.

Final advice? Stay disciplined in maintaining good credit while you enjoy the benefits of credit.

*Every situation is unique and dependent on the Bank’s risk appetite and assessment.

This article was first published in MoneySmart.