What is a Credit Score and Four Ways to Increase it

Are you planning to apply for a car loan or a mortgage? Whether you’re applying for a credit card or a mortgage, your credit score is one of the most important pieces of information that lenders will seek.

Unsure of what a credit score is or if your loan application will be approved? Read on.

What is a credit score?

A credit score is a three-digit number that lenders seek in order to help them decide whether to grant you a loan or not. This number is arrived at as a result of data collected from various financial institutions. The data considered include:

1. Your spending activity

Have you been making large purchases lately? Lending institutions may consider sudden changes in your spending patterns as a point of concern. They may view this as a reason not to extend a new line of credit to you.

2. Your account activity

How many lines of credit do you have? How many lenders have you applied to for credit facilities? Lenders consider the number of credit facilities you have as an account holder. These are considered liabilities. If you have many lines of credit, you may be viewed as having overextended yourself.

3. Your payment history

Do you make your credit card payments on time? Have you ever missed a payment deadline on any loan? Missing deadlines or failing to make payments completely is viewed negatively by lenders. This type of behavior can affect your credit score negatively.

4. Your history as a borrower

How long have you been a customer at your bank? When did you receive your first credit card? Have you always been able to make your payments in full and on time? Lenders are more likely to approve a loan application from someone who has proven themselves a loyal customer.

5. Your available credit

How many credit cards do you have? Have you taken multiple loans from various banks in Singapore? Your credit score is affected by the number of accounts you hold and how much credit you have.

6. The number of inquiries that have been made about you

Every time you make an application for credit, the financial institution to which you have applied to will make an inquiry into your credit history. Every credit score query is logged. Too many queries are often taken as an indication that you have taken on more debt than you ought to. This would have a negative impact on your credit score.

Your financial data is aggregated and a credit score assigned to you. This number indicates how risky you might be to the lender as a borrower. The higher the number, the better your credit score and the more likely you are to qualify for a loan or credit card with more favorable terms.

Why are credit scores important?

According to a guide about money lenders from Singapore, credit scores are used by lending institutions to determine the level of risk associated with lending you money. The number is used to gauge just how reliable you are at repaying loans.

Most banks and lending institutions rely on your credit score to decide whether they should approve your application for credit or not. A good credit score would increase your chances of obtaining credit. This goes for a mortgage, car loans, personal loans as well as credit cards.

Your credit score is also used by banks as a gauge of whether you would be a good customer to keep. For example, a bank would use your credit score to determine whether they should approve the renewal of your credit card.

Having a good credit score is therefore important if you intend to obtain a loan to buy a house, a car or any other big ticket item. You can access credit on better terms, e.g. at a lower interest rate if you have a good credit score. Many employers also run credit checks to determine just how reliable you are.

4 ways to increase your credit scores

1. Ensure your bills are paid on time

Lenders review your credit scores to determine just how reliable you are at paying your bills. Your credit score is an indicator of your payment performance.

Any late payment will have a negative impact on your credit score. If you want to improve your credit score, you should strive to pay your bills on time every month. This goes for your credit card bills as well as any loan you may have, including student loans and auto loans. It’s also important to pay your rent, phone bill, and other utility bills on time.

Late or missed payments will appear on your credit report for as long as seven years. However, their impact will decline as time goes by. The impact of older late payments will be less than more recent ones. Clearing all your outstanding bills as soon as possible will improve your credit score over time.

2. Get rid of errors on your credit report

Many people have errors on their credit reports that have a negative impact on their credit score. These mistakes are often the result of human error, e.g. entering the wrong account number when you make payments.

Many of these errors can go unnoticed indefinitely. It is therefore important to check your own credit card report for inaccuracies. You can get a free credit report sent to you every 12 months from the three major credit reporting bureaus, i.e. Equifax, TransUnion, and Experian. Carefully check these reports for any mistakes. Pay close attention to any payments that are marked as late or any other negative information. Are there payments that you made but are listed as late? Is there information on your credit report that should be considered too old to be listed?

Dispute errors on your credit report in order to have them removed. This means contacting the credit bureau. You should get a response within 30 business days.

3. Stay under your credit limit

Keep balances on your credit and debit cards down by making multiple small payments throughout the month. Whenever possible, make payments as soon as your purchase is posted.

Consider consolidating your debts in order to enjoy a lower interest rate while eliminating card balances. You can get a personal loan at a better interest rate in order to pay your debt and therefore save money on the interest.

Tackling your credit card debts can have a quicker effect on your credit score. This is because credit card companies report to credit bureaus every month. The sooner you begin to tackle these debts, the sooner it will be reflected on your credit score.

4. Avoid applying for new credit

Don’t open a new credit account if you really don’t need to. This is especially true if you plan to take a loan for a mortgage or a car in the near future. Unnecessary credit can have a negative impact on your credit report.

Every time you make an application for a new line of credit, it results in a hard inquiry on your credit report. Multiple inquiries into your credit report will have a negative impact on your credit score. These hard queries remain on your credit report for up to two years. Their effect will, therefore, fade in time.

The takeaway

There’s no instant or magical way to rebuild your credit score. It takes time and often involves changing your spending habits and approach to your finances. While the methods listed above do not bring about instant changes, you’re assured of getting a higher score over time and improving your chances of getting better terms on credit cards and loans.