Business

Do you know your credit score?

Do you know your credit score?
AP file photo
Published: 6:55 PM, March 18, 2017
Updated: 9:30 PM, March 19, 2017

Even though credit bureaus were set up in Singapore more than a decade ago, many people may not think about them often. Your credit report which is generated by the credit bureau is important, though, because it can affect the cost of your loans and even whether your application is approved in the first place.

HOW CREDIT BUREAUS WORK

To understand how credit bureaus and credit scores work, it’s helpful to look at how banking works.

Banks and merchants have given loans to their customers for centuries. In the past, bankers used information from their customers and their experience to decide whether to make a loan.

About a hundred years ago, according to America’s Public Broadcasting Service, small merchants in the US banded together to trade financial information about their customers so that they could get better information about whether customers paid their bills and make better decisions about whether to lend them money. These merchant associations turned into small credit bureaus, which later consolidated into larger ones. Today, a small number of large credit bureaus in each country keep credit data about consumers. Your credit report is a record of your credit payment history compiled from different credit providers.

Even though banks had more information, the quality of their lending decisions varied because they still depended on people, who might evaluate a customer differently. To make decisions more consistent, companies such as Fair Isaac (now known as Fico) developed mathematical models that used credit bureau and other data to create a score that banks could use to evaluate customers. In many ways, credit scoring used “big data” before the term even existed. Credit bureau data is often the most important factor in developing a credit score.

What this means for consumers is that banks use the information about you in the credit bureau to develop your credit score and then use the credit score to decide whether to give you a loan. As the US Federal Reserve Bank of Philadelphia explains, maintaining a high credit score is important because it helps determine whether you will be approved for credit and the cost of your loan. Applicants with high credit scores are offered typically lower interest rates and better loan terms.

CREDIT BUREAUS IN SINGAPORE

Credit Bureau Singapore was launched in 2002 as a private company owned by the Association of Banks in Singapore and information management firm Dun & Bradstreet. Since then, the Monetary Authority of Singapore has also authorised DP Credit Bureau to collect credit information on individuals. Both companies have developed credit scores that indicate the probability that a person will repay a loan.

The data in these bureaus includes information from members such as banks and finance companies as well from publicly available sources such as bankruptcy records. It includes your personal data, loan repayment history, closed accounts, credit card balances and credit limits. Banks use the data and credit scores to evaluate loan applications. If a bank reports that you made a late payment, for example, your credit score may drop and you may pay higher interest rates.

Since the information is so important, Parliament passed a Credit Bureau Bill in 2016 to help ensure that credit bureaus operate safely, safeguard confidentiality of credit information and allow consumers access to their credit records.

MANAGING YOUR CREDIT INFORMATION

Given how important credit bureau data is in determining whether you get a loan, it is essential to manage your borrowing well and ensure the information the credit bureaus have is correct.

To start, you should check the information in both credit bureaus regularly to make sure it is accurate. You can purchase a copy of your credit report online, or at the offices of the credit bureaus, or any SingPost branch, or the Consumers Association of Singapore (Case) office.

It is equally or more important to manage your loans well so that you have a high credit score. DP recommends that you repay credit on time and keep the number of loans manageable.

Along with paying bills on time, since late payments can hurt your score, financial advisers suggest keeping credit card balances below 30 per cent of the credit limit because a high utilisation rate can lower your credit score. Another suggestion is to pay off debt rather than moving it around and open new credit accounts only as needed, because having accounts that have been opened a long time can increase your credit score and new accounts decrease the average age of your total accounts.

One difficulty with credit bureaus and scores has been that individuals who haven’t borrowed, whether because they’re new to the workforce or don’t like loans or haven’t been eligible for loans, may not have a credit score and could have difficulty borrowing. To get around this constraint, some banks are starting to use data from social media such as Facebook or from mobile phones to create an alternative credit score. Even so, credit bureau data is still widely used and managing your credit report is important.

MANAGE YOUR CREDIT WISELY

While many people may not pay attention to credit scores and more than 80 per cent don’t even check their credit report, according to Credit Bureau Singapore, managing your credit information is important. To make sure you maintain access to loans and minimise your costs, check your credit report regularly and manage your loans carefully.