You can run, but you can’t hide (Sunday Times 11 Oct)

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You can run, but you can’t hide
Bad credit history will catch up with you, making it difficult to get mortgages or loans

By Lorna Tan, Senior Correspondent

Many people do not understand the importance of maintaining a good credit history. Did you know, for instance, that if your credit history is less than satisfactory it may be tough to get a mortgage or a personal loan?

Notching up a poor credit history is not that hard to do but the good news is that those who blot their copybook can make amends over time to help remove the stain.

‘Frequent late payments and taking long periods of time to repay outstanding amounts can contribute to a poor credit history, which may lead to unsuccessful loan applications,’ said Ms Helen Neo, head of consumer banking, Maybank Singapore.

It is not surprising that your credit history is a key factor lenders look at when deciding whether to extend a loan. Others include salary, job and other financial details.

So if our own credit history is so potentially crucial, we certainly ought to be familiar with this vital statistic that is checked by lenders to determine our financial health.

As it turns out, it is easy and cheap to keep track of your credit history – more details of that later.

Another reason to seek out details of your credit history is that it could act as a red flag when crimes such as identity theft and fraud are being attempted.

If, for instance, an impostor applies for a loan or credit card using your identity, a review of your credit history would bring this to light.

Reviewing this regularly allows you to be aware of any information that is uploaded on your credit file, said Mr William Lim, executive director of Credit Bureau (Singapore).

The Credit Bureau maintains data of consumers’ credit history to help financial institutions better assess individuals’ creditworthiness.

It compiles the credit history of people based on data from its 20 members which contribute specific credit performance data monthly. These members are all banks and financial institutions involved in providing consumer credit facilities here.

Here are some things you need to know about maintaining a good credit history.

Q What is a credit history and how does it work here?

A credit history is a record of an individual’s past and current borrowing and repayment patterns, including information about late payments, said Mr Nanan Waluja, head of credit operations at Citibank Singapore.

This is detailed in one’s credit report which is compiled by the Credit Bureau. It is released only under certain conditions to credit providers when they make inquiries about an individual when he applies for, say, a loan. It includes information such as:

a) Basic personal profile details such as address

b) Records of all credit checks made on the consumer

c) The last 12 repayments showing the promptness of payments relative to their due dates

d) Records of default on payments, if any

e) Bankruptcy record, if any

The report gives an indication of the person’s track record in handling credit by looking at how reliably he has repaid past debts.

Q What does it mean to have a bad credit history?

A bad credit history would comprise a record of missed payments and defaults. For lenders, meeting payment obligations is important, so a history of timely payments is a clear advantage.

While different credit providers use different methods for credit assessment, here are some of the factors which lenders look at when assessing credit applications:

1. How affordable is the loan for the applicant given his income and expenses?

2. What assets does the applicant own?

3. How does the consumer manage debt? What are his payment patterns?

4. How many loans and other credit facilities does he have? What is his current total debt?

5. Does he have a record of bankruptcy proceedings, litigation or payment defaults?

Q What are the consequences of a bad credit history?

A consumer with a bad credit rating may find it harder to get a credit card, a mortgage, a motor vehicle loan or a personal loan. He may even find his application for such loans rejected.

Mr Lim said in some countries, though not yet in Singapore, credit ratings can affect the pricing of credit. A consumer with a bad credit history or rating will be able to borrow funds only at a higher interest rate. Conversely, a consumer with a good credit record is rewarded with more attractive rates.

In short, a good credit repayment history will make it easier for you to obtain credit and to qualify for loans.

Q How do you clear your bad credit history?

The main emphasis among lenders is on the more recent payment behaviour. For example, an account that shows a delinquency seven months ago but that has been current since is likely be treated as a lower risk by a lender than an account that shows a delinquency in the last one or two months. As recent history carries more weight, getting into the habit of making on-time payments will improve your credit profile even if you have slipped up in the past.

For existing accounts, information on the account’s history will be displayed on a rolling 12-month basis in the credit report.

Information on any defaults will be retained in the credit report until such defaults are discharged or otherwise settled.

For defaults where the outstanding amount has been settled in full or on a negotiated settlement basis, this will be shown for three years from the date of settlement.

It is important to note that each lender has a different risk policy and therefore it is possible for one lender to decline an application and another to approve based on the same Bureau data.

Q Where can you go to check on your own credit history?

Your credit profile changes based on your financial activity, such as each time you apply for a credit card or loan. The Credit Bureau suggests that consumers check their credit reports every six to 12 months to ensure that the information is accurate and up-to-date.

At a cost of $5 plus GST, you can get a copy of your credit report through various channels including online from the Credit Bureau at www.creditbureau.com.sg or at any SingPost branch islandwide.

Consumers who wish to guard against identity theft can also subscribe to My Credit Monitor, a 12-month monitoring service that alerts them whenever financial institutions notify the Credit Bureau about missed payments on loans or when an application for credit is made in their names. Once they sign up, they will also receive a complimentary copy of their credit report.

The cost: $35 and $40 plus GST, for e-mail and postal alerts respectively.

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Tips on keeping a good track record

Pay your bills on time

To be safe, always pay your credit cards in full and on time. If you really cannot pay the entire balance each month, at least pay the minimum amount promptly. And if you have problems doing even that, inform your bank early so that a management payment scheme can be worked out. Doing so will also signal your commitment to pay up, said Mr Joseph Wong, OCBC Bank’s group chief credit officer (consumer credit risk management).

Mr Rahul Gupta, chief executive of GE Money Singapore, pointed out that if you continually make only minimum repayments, especially on several accounts, lenders will still question your ability to pay.

Avoid multiple sources of credit

Mr Wong advised consumers to avoid applying for more credit lines or credit cards than they need. This is because it will raise questions on their ability to manage and service the various credit card bills. Besides, it is easier to keep track of two credit cards or loans than say, six, added Mr Gupta.

Don’t exceed your credit limit

If you spend beyond your credit limit, it may reflect your inability to handle your finances properly, especially if all your credit lines are fully used up.

Opt for Giro arrangements

Sometimes, defaults on repayments are simply due to an oversight by the borrower. To overcome this, Giro arrangements as well as other standing instructions for recurring payments ensure prompt repayment, a spokesman for United Overseas Bank suggested.

Keep track of your debt servicing ratio

To approve loans, banks typically use the debt servicing ratio, which is the percentage of one’s monthly income used to service long-term liabilities. The recommended healthy debt servicing ratio is 35 per cent or less, although every bank has different acceptable levels of debt servicing ratio.

Initiatives to encourage responsible borrowing

Some financial firms have schemes to promote prudent borrowing. For example, GE Money waives the last month’s instalment for consumers who meet their payments over the loan’s term. Its other ‘interest waiver’ feature rewards customers with 50 per cent off three months’ interest, for paying promptly in the first year of their loan.

Do not be afraid of credit counselling

If you are overloaded with high-interest debt and are in danger of falling behind on your payments, or you already have, consider working with a non-profit agency such as Credit Counselling Singapore to set up a debt repayment plan, said Mr William Lim, executive director of Credit Bureau (Singapore). These services can negotiate lower interest rates and help you pay off your bills within a few years.

Avoid bankruptcy if you can

Bankruptcy is a disastrous impediment to one’s good credit reputation, far worse than delinquencies and missed repayments on loans. Its impact, however, depends on how many defaults you made on your credit before you filed, said Mr Lim.

lorna@sph.com.sg