Using a credit card will offer you many perks and discounts, but the best reward of them all is a healthy credit score that you can maintain.

Sadly though, too many Singaporeans do not know what their score is, how to grow and most of all why they need it. Owing to this – many unknowingly end up hurting their scores by making several common credit mistakes.

How then can you tell if you are making credit mistakes? To help you identify these, here is a look at several things you might be doing negatively affect your score. Let’s dive right in!

Why Your Score is Important

The credit score is the numerical representation of your previous borrowing and payment records. It not only considers your previous credit card transactions but also the payment of loans as well. Some of these loans may include car loans, home loans, and personal loans.

Your score shows moneylenders and other financial institutions if you are creditworthy and the level of risk involved by lending to you. Simply put, the higher your score, the higher the likelihood banks and moneylenders will approve your loan or credit card application. In addition, they might offer you higher limits of borrowing and lower rates.

Growing a healthy credit score can take years of responsible financial activities, that may include:

  • Making punctual repayments on your loan and credit card
  • Keeping a utilization ratio not exceeding 30% on credit cards
  • Opening a new card account only when it’s necessary (e.g. getting travel credit card since you travel more for business)

The growth of a healthy credit score takes years. So, maintain it well by staying away from the mistakes listed below:

#1 Not Evaluating Your Credit Report

Although you settle your balances in full each month and even monitor the usage of your credit card. It is possible for you to lose points off your score resulting from events that are beyond your control, like lender error or credit card fraud.

You could consider evaluating your report once each year to make sure that accounts in your name are correct. Also, it is to check if there is a major decrease in your credit score.

While going through your report, be sure to confirm the following errors:

  • Credit card and loan accounts that are not your, because of wrong information (e.g. receiving a report and account information of someone whose names sounds similar to yours).
  • Fraudulent accounts running under your name.
  • Wrong status of your account(e.g. a paid or closed account is not listed as such).

When you notice errors in your report, you need to inform the Credit Bureau. By doing that, your score will not be affected due to a mistake made by the moneylender or bank or a fraudster activity.

#2 Not Knowing Your Credit Utilisation Ratio

Not knowing the amount of credit you are using might easily end up being a growing credit utilization ratio. The utilization ratio is the percentage of credit used. For instance, if your credit limit is S$10,000 for your card, and you use S$3,000. This will translate to a 30 per cent credit utilization ratio. So the faster this ratio grows to above 50%, it means that your credit rating will drop fast.

Be sure to always keep tracking your full credit utilization ratio. Even when you have low balances on nearly all your cards. All that sit takes is a single maxed out card or even one a high utilization ratio and your score is negatively affected.

For instance:

Given that you hold 3 credit cards.

Credit CardLimitBalanceUtilization Ratio
#1S$12,000S$300025%
#2S$10,000S$200020%
#3S$8,000S$750093.75%

 

Although the utilization ratios for cards 1 and 2 are good, the nearly maxed out credit card 3 has raised the total credit utilization ratio score to 49.5 per cent. And this will for sure negatively affect your credit score.

#3 Getting Rid of Your First Credit Card

Realize that it may be a good idea to cancel a credit card which does not provide you much value. Factors like lack of cardholder incentives, high rates, and a crazy high annual cost are sufficient reasons to be rid of the credit card.

But you need to think twice before cancelling the “bad” card. When this is your first card, it is possible it is your oldest credit line. Hence it means it holds the longest history of your repayments. In such a situation, what can you do? Since it reflects your longest record, it is better for your score than when you have a short record. It is for this reason that choosing the most suitable credit card as your first is crucial.

For instance: given that you hold 2 credit cards, with your first card being with you for 10 years. However, you hardly use it since it lacks rewards.

Your second card is 7- years, and you use it often since it gives you great rewards. By cancelling the first card to get a new one offering better rewards may be a good idea. However, this is not the case. In so doing, It will negatively impact your score by decreasing your history on paper to7-years from 10 years. And this is enough to lower your score a grade or two.

Note: When your first card offers you a really bad rate of interest or a higher annual fee, then it may be a good idea to talk to the credit card provider as their “long-time customer” regarding lowering the rates of interest and even waiving the yearly fee.

In Closing

Keep in mind that, a healthy credit score will make a big difference to the personal loan interests that moneylender or banks will offer you. Also, it will impact the employment opportunities you will receive (several companies look at your credit health as they conduct the hiring process). with this in mind, be sure to protect your score by staying away from the mistakes mentioned above!