BUREAU CREDIT SCORE

A Bureau Credit Score is a numerical expression to represent the odds or probability that a borrower will become a "bad payer", at a particular point in time that will help the banks and finance companies to assess the borrower's credit risk. The calculation of the Bureau Credit Score is based on the Probability of Default model, of which primarily derived from an analysis of the borrower's historical credit performance.

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A high score indicates that the borrower has a low credit risk, i.e. always making prompt payments and have never missed a payment. Someone with a low credit score is considered as a high risk borrower, having a greater risk of missing payments or defaulting.  The Bureau Credit Score ranges between 215 and 570.

THE COMPONENTS OF A BUREAU CREDIT SCORE

The Bureau Credit Score is calculated based on the credit related data available in the Credit Bureau's repository. 5 factors make up the Bureau Credit Score:

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Length of Credit History

The longer the record of good history, the better your credit score will be. A long credit history makes it easier for banks and finance companies to assess how well you have managed credit in the past.

Amounts Owed

Your credit score measures how much outstanding debt you have in comparison to the amount of credit available to you. Individuals with numerous credit lines that are all completely maxed out provides an image of someone who is unable to manage their debt responsibly. This will likely have a negative impact on his credit score.

To appear as a reliable borrower, the debt utilisation ratio should be kept as low as possible at all times. Maintaining a low utilisation ratio applies to individual lines of credit and the total amount of loans.

The debt utilisation ratio is the percentage of a borrower's total available credit that is currently being utilized. It is a calculation that represents the total debt a borrower is utilising in comparison to their total revolving credit. Lowering the debt utilisation ratio can help a borrower to improve their credit score.

Below is an example of how a debt utilisation ratio is calculated. Say a borrower has three credit cards with different revolving credit limits.

Card 1: Credit line $3,000, and an outstanding balance of $500

Card 2: Credit line $7,000, and an outstanding balance of $5,000

Card 3: Credit line $10,000, and an outstanding balance of $3,000

The total revolving credit across all three cards is $3,000 + $7,000 + $10,000 = $20,000. The total credit used is $500 + $5,000 + $3,000 = $8,500. Therefore, the credit utilisation ratio is $8,500 divided by $20,000, or 42.5%.

Payment History

Your repayment history reveals to banks and finance companies how reliable you are, as a borrower, in making repayments. The banks and finance companies rely heavily on an individual's loan repayment history as it is often used to predict the individual's repayment behaviour in the future.

It is important to ensure you make consistent and timely payment for both revolving loans (such as credit cards) and installment loans (such as home mortgages or vehicle financings), as the score takes into account how much, how often and how recent were the missed payments.

New Credit

Borrowers, even those who are new to credit, should avoid opening too many credit lines at the same time, since such behaviour could suggest that they are in financial trouble. You are advised to only take on additional credit when you really need it or when it makes sense financially.

Types of Credit in UseTypes of loans and credit cards you hold – secured credit (home, car loans) vs unsecured credit (credit cards, personal loans).


KEY BENEFITS OF A GOOD CREDIT SCORE

You will establish a good credit history by demonstrating to banks and finance companies that you are able to manage your loans responsibly and that you are creditworthy.

With a strong credit score, you will have more favourable financial options and better opportunities of getting a loan. Your credit history is one of the most important factors banks and finance companies will consider when you apply for a loan or a credit card.

In a nutshell, the key benefits of having a good credit score are as follows:

  • Fairer credit assessments, as credit providers are now able to objectively assess your creditworthiness;
  • Faster credit decisions, as credit providers are able to improve their efficiency in assessing credit application by distinguishing between high and low risk borrowers;
  • Improves access to credit, as you are able to prove that you are financially secure and creditworthy. Credit providers may be willing to lend you more money if you have financial capacity, as well as a strong credit score; and
  • Enables you to negotiate for better terms of financing, as credit providers would normally wish to attract and retain good customers.


TIPS ON HOW TO IMPROVE YOUR CREDIT SCORE?

There are no shortcuts to a good credit score. It takes time and effort to improve your score. Consistency and having a sense of responsibility is key for rebuilding credit health. Some tips to improve your credit score include:

  • Pay your loans and bills promptly. If you have missed payments, get back on track and try to be consistent in making payments;
  • Keep balances low;
  • Avoid opening new and multiple accounts too quickly as it may indicate that you are not effectively managing your loans, which, in turn, will affect your credit history;
  • Avoid closing unused credit cards as a short term strategy to raise your scores;
  • Apply for new credit accounts only when necessary.  If you decide to have credit cards, manage them responsibly; and
  • Negotiate with the bank or finance company on restructuring your loans if you have trouble in managing your finances.