It may be hard to believe but having a good credit history plays an important role in your financial life.
A good credit history and credit score will make or break your plan to finance the big ticket items in life such as qualifying for a car loan, taking out a mortgage, planning a wedding or any other purchase.
Here are some tips to build a positive credit history, step by step:
1. Get a credit card
Signing up for a credit card is the obvious first step to building up your credit history.
Credit cards are a valuable stepping stone to measuring and tracking your credit and financial progress over time.
How you charge purchases to your credit card and pay off your credit card debt every month will determine your credit standing and show how much of a credit risk you are.
Here are some other tips to build up a good credit history.
- Pay your bills on time, all the time
A missed credit card bill payment will have the greatest and longest lasting impact.
The more recent the missed payment occurred, the greater that impact will be, and the more missed payments you have, the longer it will take to recover.
Note: Default records stay on your credit report for three years upon full or negotiated settlement while bankruptcy data is retained for five years from the date of discharge from bankruptcy.
- Pay down your debts and consider charging less
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. The more debt you pay off, the wider that gap and the better your credit score.
- Limit the amount of cards
More cards and higher credit limits could trick you into spending more.
If you are not careful, you could end up overspending. Also, this increases the odds of not paying one of your credit bills on time.
Cancel any unused cards – It is more manageable to keep track of two credit cards than 10.
Note: Previous Enquiries are retained on your credit report two years from the date of enquiry.
- Don’t be afraid of credit counselling
If you are overloaded with high-interest debt and are in danger of falling behind on your payments, consider working with Credit Counselling Singapore.
The organisation helps people with unsecured consumer debt problems through credit education and debt management programmes.
2. Watch your spending: the Debt-to-Income ratio
Yes, we just told you to get credit by any means possible. That said, you wouldn’t want to whip out your cards to pay for everything.
A rule of thumb to determine how much credit you can take on is to compare how much you owe with how much you earn.
A simple calculation based on these two factors is called the Debt-to-Income ratio. Here is an example of how the Debt-to-Income ratio is calculated:
Calculating your Debt-to-Income ratio
Monthly debt repayments = $800
Monthly take-home pay = $3000
Debt-to-income ratio = $800/$3000 = 0.267
With the above monthly expenses and take-home pay, you would have a debt-to-income of 26.7% (0.267 x 100%).
It is important to have a better understanding of your financial situation in order to meet your financial obligations. Commit to writing every cent spent.
Making a habit of watching the debt-to-credit ratio is a good habit to cultivate.
3. Get a copy of your credit report from Credit Bureau Singapore (CBS)
A copy of your credit bureau report from CBS is one of the next steps you can take on your road to financial independence.
It is important to review your credit report every six months and check your credit history.
The credit report will contain a record of your credit payment history compiled from different credit providers that provides valuable insights into your financial history, knowledge and repayment behaviour.
This encompasses a comprehensive assessment of your aggregate credit limits and outstanding balances under your credit cards or other facilities across financial institutions into your credit file.
You become empowered to make better-informed decisions for future applications of credit facilities.