Understanding credit scores and why they matter

Understanding credit scores and why they matter

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

Understanding credit scores:

  • Credit Bureau Singapore (CBS) collects and aggregates information to provide borrowers’ total credit risk profile to financial institutions.
  • Financial institutions refer to your credit report to determine their willingness to lend to you and the price at which they will lend to you.
  • Your account repayment history is kept on a 12- month rolling basis, for your credit score calculation. So it is possible to improve your score for the future.

Examining your credit rating with credit bureau Singapore

Did you know that your credit payment history is “on the record” and affects how financial institutions like banks regard you as a borrower? This may sound scary. But it is a fact of life in almost every country with a developed financial system. So, instead of freaking out, understand how the system works, and stay in its “good books”, so you can get access to loans at the best rates.

In Singapore, the heart of this system is an organisation called Credit Bureau Singapore (CBS), which collects and aggregates information from participating members, which range from banks to finance companies to credit card companies, to provide a total credit risk profile of borrowers to financial institutions.

This profile informs financial institutions of your credit risk and is at the core of their willingness to lend to you and determines the price at which they will lend to you.

How does your behaviour affect your credit rating?

At the heart of CBS’ service is the “credit score”, which rates you on your financial activities – giving lenders an understanding of your ability to service loans and your risk of defaulting on your loans.

The factors that determine your score are:

  • Amount of credit used - The more debt you take on, the lower your score.
  • Applications for new credit – If you have been taking on new credit facilities (i.e. more debt) within a short period of time, financial institutions may suspect you are over-extending yourself. This could lower your credit score.
  • Late payments on loans - Also known as “delinquency”. These are regarded as negatives, which will drag down your credit score.
  • The length of your credit history - Lenders prefer borrowers with a longer credit history than those with a short history or no credit history. But of course, you would want a history of prompt payment of debts to support your credit score.
  • Available credit - This refers to the number of credit facilities you have. Your credit score can be lowered if you have multiple lines of credit and credit cards.
  • The number of your credit applications and banks’ inquiries into your credit score– Every time you apply for a new loan or a credit card, the financial institution involved will inquire into your credit score with CBS. This is then noted by CBS and shared with other financial institutions. Your credit score may be negatively affected if you have made many such applications within a short space of time, as it will signal that you are looking to take on more debt.

What is your credit score?

Your credit behaviour as outlined above is aggregated into a score between 1,000 and 2,000. Those on the lowest end of the scale, that is 1,000 points, are flagged as having the highest risk of defaulting on a payment. They are rated HH. Those at the highest end of the score range, at 2,000 points, are perceived to have the lowest risk. And they would enjoy the best credit rating of AA.

Lenders will use the credit score as one factor in their lending decisions. Other factors may include your annual salary, length of employment and bankruptcy or litigation information. Your credit score may also influence whether the lender will extend loans to you at the lowest rates offered to the borrowers with the best credit rating.

Your account repayment history is kept on a 12-month rolling basis, for your credit score calculation. So, it is possible to rebuild your account repayment record within 12 months if you are on time with all your payments.

However, inquiries by financial institutions for your credit report will be retained for 2 years. Default records with the status of “negotiated” or “full settlement” will be displayed for 3 years. Default records with status of outstanding, partial payment and “sold off” will be displayed indefinitely.

What happens if your debt spirals out of control?

This is why it is important to keep tabs on your debt situation and stay in control. If you are in default of debt exceeding $15,000, your creditor (lender) can take bankruptcy proceedings against you. If you are declared bankrupt, all your assets (except for protected assets such as your HDB flat and CPF monies) will be sold, with proceeds going towards settling your debts.

If you are employed, you have to make a monthly contribution to the “bankruptcy estate”—towards paying down your debts—from your salary. Your record of bankruptcy from the Insolvency and Public Trustees Office will remain on your credit report for 5 years after you have been discharged from bankruptcy.

Do you know what your credit score is? Most of us don’t have a clue where we stand with lenders. You should check your status. It takes only a few minutes online and costs only $6.42. Alternatively, you can pay $17.12 at SingPost branches for a 2-hour service. If you have recently made an application for a credit card, the processing bank would have made an application for your credit report and may share it with you at no charge.

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