Thursday, September 20, 2012

Money Matters: What is Credit History?

Money Matters is a short series of articles written by Ho Khin Wai, a Diploma in Banking and Financial Services student, in an effort to raise the level of financial literacy among NYP students. He will cover various relevant topics on personal finance for teenagers in Singapore, and strives to make these articles fun and easy to understand.

As we grow older, most of us will definitely need to take at least a single loan in our lifetimes. “Why do I need a loan? Can’t I just earn enough money and pay everything off in one go?” you may ask.

Well, unless you are one of the super-wealthy, you will certainly need to take up a loan to buy some of life’s must-haves such as a home. You might also take up a loan when you need cash urgently, such as for emergencies or paying off debts.

The thing you should realise is that your loan applications may not be approved all the time. And this is where credit histories come into play.

A credit history is a document held by an institution gazetted(officially recognised) by the Monetary Authority of Singapore (MAS). It contains some very personal and specific information about how an individual uses credit. It is the record of everything relating to any credit that you have ever had. In fact, your credit report starts to be logged when you apply for a credit card or get a first loan.

Having a good credit history can increase your chances of getting that loan you really need
This is because the bank relies on this valuable information to ascertain whether you have the ability to pay back the loan if it is granted. If you have a bad credit history, your credit score will go down. If the score does not meet the bank’s required minimum score, your loan application may not be approved.

Now you know about credit histories and credit scores, how do you go about building a good credit history? Here are two rules to help you establish a good credit history.

Rule #1: Pay any outstanding credit on time

With great “power” comes great responsibility. Be sure to pay off any monthly payments in full and on time. You may leave a bad mark on your credit report if you default on the payments or only make the minimum payment each month.

Rule #2: Start small

Your credit history is built brick-by-brick. You may think that applying for many credit cards and loans will boost your credit history as there is the mistaken impression that you have more credit available and thus contributing to an increased credit score. Although it is true that your credit capacity will be widened as you increase the number of cards you hold, the danger comes if you default on your payments. It also sends a signal to banks that you are desperate for credit and are a risk to the bank if you take a loan.

It is advisable that you start small, by having only one credit card on top of your other essential loans. Starting small also means using only a small amount of your credit. This makes it easier for you to manage your payments so your chances of defaulting will decrease.

Establishing a healthy credit history takes time. If you find yourself delaying a payment, go back to those two rules above and remind yourself that it is harder to reverse a bad credit history than to maintain a good credit history.

Do you need to check on your credit standing?

An individual can request for his own credit report to check on his credit standing through a credit bureau. There are two credit bureaus in Singapore one should be familiar with: Credit Bureau (Singapore) and DP Credit Bureau.

Credit Bureau (Singapore) will provide you with your credit report detailing your credit history and related information at a cost of $5. DP Credit Bureau provides a copy of your Consumer Credit Score at a cost of $2.50.

This information about your credit history allows you to fix any inaccuracies that may end up on your credit report and make decisions about whether to take up another line of credit.

Photo Credits:
401(K) 2012,
Khin Wai is an NYP Year 2 Banking and Financial Services student from School of Business Management (SBM). He started writing for NYP Portal in 2011 out of interest and was soon "addicted" to it. He has also written book reviews for Straits Times YA Classified. Besides writing, he loves singing and has performed for various events in NYP under NYP Soundcard

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