Credit Score

For some time now, i have been wondering what is my credit score. In this post, I try to answer some questions plus its an excuse to whine about some negative aspects of having certain cards.

Credit Score:
1. How  does it affect my ability to take loans?
2. How do banks make use of this information?
3. Lastly, how to get the best score and maintain it?

I knew for sure that my credit score would not be the best since i missed payments several times on my Diner Club either because i forgot about it, couldnt find an AXS machine or couldnt be bothered to queue up behind people who clearly don't know how to use one. 
However there seems to be too many SAM machines out there but they only take bill payment for Visa cards.

I even missed some payments on my AMEX cards before but their customer service is really too good, not only did i managed to reverse any late payments but also got my card renewal for free including supplementary card.

(Tell you what Diner Club in my opinion is the most useless card i carry around. Checking online statements is a horrible experience in the past, not sure how it is now since they upgraded their online platform. But i am convinced that i will cancel the card once by renewal time next year)

Anyway paid the $6.42 (incl GST) for the report through Credit Bureau Singapore and to my astonishment I got AA score. I think most people who make an effort to pay their bills on time would also get AA grade.

I still have to be careful because a score of 1933 is in the lower end of the AA, If it falls below 1911, i might have gotten a BB score. Must make sure I pay my bill on time every time from now on. 

To answer the questions just now: 

1. How did they come up with the score?

Obviously there is a formula but i don't know which one the credit bureau used. you just have to remember that credit score is reflecting several things:
a. Payment History
Measures how responsible you are at paying what you owe 
b. Amounts Owed
Also important. It looks at how much of your available credit you are using. Also known as credit utilisation ratio, it assesses how close you are to maxing out the credit that has been given to you.
c. Length of Credit History
Looks at age of all your accounts, individually and averaged together, and assesses how much time has passed since you opened the accounts.
d. Types of Credit Used
Considers the kind of credit you have, from credit cards to installment loans on your car, home or student loan.
e. New Credit
This looks are the number of accounts you have recently opened. In addition to the amount of inquiries that have been made lately by those checking your credit for purpose of lending you money.

2. How do banks make use of this information?

Payment History
Banks will look at payment history as an indication of how  you'll handle future debts. If you have met your obligations responsibly then lenders will think you'll continue to be responsible paying back your debt.

Amounts Owed
If you use alot of your available credit, lenders may think you are over-stretching and you might not be able to make future payments. Banks usually look at credit utilisation ratio of 30% for housing loans in Singapore. *Ever wondered why banks in Singapore usually give out 3/4 times your salary as credit limit? thats why. but some like UOB/OCBC gave me 4 times - good for me cos i can maintain a lower ratio.

Length of Credit History
Banks will see your track record of repaying debts. The longer you have used credit wisely, the better because they will trust your ability and determination to stay current on your accounts.

Types of Credit Used
Banks like variety of course. Different kinds of credit, both cards and loans.

New Credit 
Taking on too much new credit is a warning sign to lenders. They will want to know why you suddenly need so much new credit, maybe cos you are in financial trouble?  

to your payment history as an indication of how you’ll handle future debts. If you've met your obligations responsibly, lenders will think you'll continue to be responsible paying back your debt. - See more at: http://www.onyourown.org/blog/anatomy-of-a-credit-score.aspx#sthash.NnUmL5JT.dpuf

Lenders look to your payment history as an indication of how you’ll handle future debts. If you've met your obligations responsibly, lenders will think you'll continue to be responsible paying back your debt. - See more at: http://www.onyourown.org/blog/anatomy-of-a-credit-score.aspx#sthash.NnUmL5JT.dpuf

3. Lastly, how to get the best score and maintain it?

Payment History
Make payments on time, every time. If you have missed a payment, pay it off as soon as you can. If you cannot remember (like me) then set up reminders on your phone or use Giro services.

Amounts Owed
Try not to spend more that 25% of your credit limit. If you need more money, ask for limit increase. Maintain a good ratio, do not take it as a license to spend.

Length of Credit History
If new to credit, there's nothing you can do. Just let time go by and your credit history will build up over the years. But be careful not to open too many accounts at once because you will lower your average account age. Also keep a 1 or 2 of your oldest credit card open even if not using them, this will bring up the average age.
 
Types of Credit Used
Do not get unnecessary credit but pay attention to the different kinds of credit/loan available in the market. Remember Car loan is a liability, Home loan is a liability (unless you are renting it out with profit), Studen loan is a liability (However necessary if you want to make it on your own, but start paying it off as soon you land a job).

New Credit 
Opening new accounts can help your credit score, but everytime you do that, there will be an inquiry that will remain there for 12 months. If you are planning to get a home loan, avoid opening smaller accounts beforehand. 
I am guilty of this. Applied too many credit cards when i got my first job. Slowly realising that actually no need so many cards. Wish someone wise would have told me back then. 

4. I discontinued a few cards since last year and will stop renewing Diners Club. Will it affect my credit score?
My guess is cancelling a card does not result in an inquiry, but will affect length of credit history. I will still hang on to my favourite cards so on average i believe score will improve if you have lesser cards. What do you think?  

**I am no advertising for any banks or their cards here. But i never did regret taking up the OCBC Platinum, UOB One, AMEX Platinum and Citibank SMRT card. These are by far the most useful to me.