How To Achieve An Excellent Credit Score
Purchasing a new car or a home after receiving a huge bonus? You probably may have considered taking up a bank loan to facilitate the process. The bank may smoothen the process of getting what you want, but it may require you some time, effort, and patience especially if your credit score fails you. Understanding how your credit score is evaluated is a prime booster to being financially healthy.
What is a credit score?
A credit score is an aggregated number that financial institutions use to determine whether they can approve or disqualify your loan application. It is a joint effort by all financial institutions in Singapore, where information about a consumer’s credit history is pooled together and aggregated. Institutions within the aggregated data would have access to the records that indicate the number of accounts under your name across various banks and your payment history.
There are specific unique algorithms used to determine an individual’s credit score. The credit is usually issued by the credit bureau of Singapore and ranges from 1000 to 2000 with the higher score meaning a lower lending risk for the financial institution involved. A credit risk score of AA is excellent, and individuals with this score are more likely to qualify for loans compared to other grades.
How to achieve an excellent credit score
Repay your loans on time
One of the fundamental factors that affect loan application is late payments. It is a common fact that no one will be willing to lend you money if you can’t pay back on time. By the time you receive the second or the third letter reminding you of unpaid debt, your credit score would have dropped already. This happens automatically irrespective of whether the bank places fines or not. If you can repay the loan in full, the better, but if you can’t manage to clear the whole amount, always pay at least the minimum amount before the billing cycle ends. For mortgages and personal instalment loans, speak to a credit counsellor or inform the bank early if you think you may miss the payments, it is possible for the bank to create an alternative scheme for you which will not damage your credit score.
Avoid loan inquiries from different institutions in a short span
You don’t want to imply that you are “credit hungry” when applying for a loan. It is an indirect way of announcing that you are in a financial crisis. Most financial experts agree that multiple loan inquiries in quick succession only means that you have other loans that are either at or past default. Remember that loans are there to facilitate processes not help you escape your problems.
Check credit report and rectify any mistakes
No system is perfect, not even the credit score system in Singapore. Therefore, with that in mind always check the information from your report from the credit bureau Singapore and see if it’s correctly done. If you encounter any errors, do the necessary by reporting it and take the steps provided to ensure that it is corrected. Do some follow ups even after the correction to ensure it does not reflect on our score. It is advisable to check every once a year.
Keep your credit active
The truth is that we all take loans because we are short on funds. If everyone had enough money, then there would be no point of applying for loans. Financial institutions have taken advantage of the fact that we rely on loans particularly when we have large purchases to make. Therefore, it may seem contradictory that simply paying your loan and keeping off credit is not good enough.
In Singapore, it is not uncommon for your loan application to be rejected even if you’ve never defaulted or have any credit balance. Here is the catch. One of the purposes of having an excellent credit score is to prove to all financial institutions that you’re responsible in how you use your credit. That means that if you do not use your credit, financial institutions have very little information to help trust you. It is like starting competition and exit in the middle and still expect to get good results.
“In today’s world of credit repair, part of proving you’re a good credit consumer is actually using your credit.” – Ivan Guan
Remember that these institutions don’t know you, hence they may not know or understand why you no longer take credit. Even if you do not need loans anymore, a time may come when you may need to apply for one. Therefore, take small payable amounts every now and then to keep your score consistent.
Avoid defaulting loans
If you default on a loan, the aftermath will appear on your credit score report indefinitely. A little insight—you move two ranks down from your current grade. For instance, if you were at grade BB, you will move from that BB to DD or worse depending on the number of defaults, the length of the default and amount. In other words, a single major default can get you into serious trouble or ban you entirely from ever accessing loans.
Keep short-term loan repayments to repair your damaged credit score
A credit score is determined by a system, not a human being. Therefore, it is easy to play your cards smartly. The system feeds in information as it receives, which means that if you take three loans consecutively making prompt payments, you will get three excellent ratings irrespective of the previous mistakes. If you suspect that your credit score is not in its best condition, try applying for small or short-term loans and settling the amount in full without fail.
It will take time, but with time, the efforts will start paying up. If you intend to take a major loan anytime soon and your grade is not AA, start doing this for a one year or two. By the time you apply for the loan, your credit score rating will not be anything below AA.
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