The best reward you can receive for using your credit cards wisely are not the membership points, air miles or cash back, but the good credit score you can maintain.
Unfortunately, too many people have little or no understanding of what their credit score is, how it is built up and why it’s so important in the first place. Even worse – many unknowingly hurt their credit scores by making common credit mistakes.
Why Your Credit Score Matters
Your credit score is a numeric reflection of your past borrowing and repayment history. It takes into account not just your past credit card transactions, but your repayment of loans as well, such as home loans, car loans and personal loans.
It gives banks and financial institutions an indication of how creditworthy you are and how much risk is involved in lending to you. In simple words, the greater your score is, the more likely banks are to approve your credit card or loan application, and offer you lower interest rates and higher borrowing limits.
Building up a good credit score will take years of prudent financial activities, which includes:
- Maintaining a credit utilisation ratio of no more than 30% on your credit cards
- Making your credit card and loan repayments on time
- Open a new credit card account only when you need to (e.g. applying for a travel credit card because you do more business travel)
Here is a chart from the Credit Bureau Singapore (CBS) showing the credit score ranges and risk grades:
It takes years to build up a good credit score. So, keep it well by avoiding the following mistakes:
#1 Losing Track of Your Credit Utilisation Ratio
Losing track of how much credit you’re using can easily lead to a growing credit card utilisation ratio, which is the percentage of the credit used. For example, if you have a S$10,000 credit limit on your card, and you’ve used S$3,000, it translated to 30% credit utilisation ratio). And the faster the ratio grows over 50%, the faster your credit rating drops.
Make sure you keep track of your total credit utilisation ratio at all times. You may carry low balances on most of your cards, but all it takes is one maxed out credit card or a card with a high credit utilisation ratio to hurt your credit score.
Let’s say you have three credit cards.
While the ratios for cards #1 and #2 are great, a nearly maxed out card #3 raised the overall credit utilisation score to 49.5%, which will certainly make a dent in your credit score.
#2 Getting Rid of Your First Credit Card
There’s nothing wrong with cancelling a credit card that provides little or no value. Factors such as lack of cardholder rewards (read: low cash back or frequent flyer miles), high interest rates and a ridiculously high annual fee are good reasons to dump a credit card.
But you should think twice about cancelling that “bad” credit card if it happens to be your first credit card, as chances are good that it’s probably your oldest line of credit. And a long history of making repayments reflects better on your credit score than a short one.
This is why, choosing the right credit card for the first is crucial.
You have two credit cards, with the first card being held for 10 years, but you rarely use it because it lacks rewards.
You’ve had your second credit card for seven years, but you use it regularly because it has great rewards.
Cancelling your first credit card for a new one with better benefits sounds like a good idea, but it is not. It will hurt your credit score by reducing your credit history on paper from 10 years to seven years. And that will be enough to drop your score a risk grade or two.
If your first credit card has a really bad interest rate or a high annual fee, it’s worth talking to your credit card issuer as a “long-time customer” about reducing the interest rate and waiving the annual fee.
#3 Not Checking Your Credit Report
Even if you pay your balances off in full every month and monitor your credit card usage, it’s still possible to lose points on your credit score due to events that are out of your control, such as bank errors or worse – a credit card fraud.
You should evaluate your credit report at least once a year to ensure that the accounts under your name are accurate and to monitor if there is any major decline in your credit scoring.
In the midst of going through your credit report, keep an eye out for the following errors:
- Loan and credit card accounts that don’t belong to you, due to wrong information (e.g. having account information on your report from someone with a similar sounding name).
- Fraudulent accounts opened in your name.
- Wrong account status (e.g. a closed or paid accounts may not be listed as such).
You should notify the Credit Bureau if you find any errors in your credit report. In that way, your credit score will not suffer from a bank’s mistake or a fraudster’s actions.
Remember, having a good credit score can make a huge difference in the loan interest rates banks offer and even the employment opportunities you receive (some companies check your credit health during the hiring process).
So protect your hard-earned credit score by avoiding the mistakes above!
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.
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