With the coronavirus pandemic expected to keep global interest rates “lower for longer”, it has become increasingly attractive to get a new home loan or refinance your mortgage. Major banks in Singapore have reported an increase in refinancing inquiries as consumers look to take advantage of lower mortgage rates, which have fallen by 0.4% to 0.5% from last year.
But just because you can benefit from lower interest rates doesn’t mean that you can—you must qualify for the loan first. And as the pandemic has wreaked havoc on many people’s financial situations, this may have led to depressed credit scores—a major factor for banks when assessing home loan applications.
At PropertyGuru, we have previously gone over detailed ways to manage your cash flow amid the pandemic. In this article, we will focus on the all-important (but often neglected) credit bureau report. We will explain what it is, how to interpret it, why it matters, and where to get it.
What is a Credit Bureau Report?
A credit report is a type of standardised “scorecard” that financial institutions use to help assess your creditworthiness—how likely you are to be able to repay your loans. Singapore’s largest provider of credit reports is Credit Bureau Singapore (CBS), which is why it is also called a credit bureau report.
How to read your Credit Bureau Report
You can see a detailed explanation of all the items that go into a typical credit report here, but as a quick summary, the key things to pay attention to are:
- The Credit Score – Ranging from AA to HH, with an equivalent numerical score from 1000 to 2000. Each score has an imputed probability of default. For instance, having the highest score of AA means your odds of defaulting are assessed to be less than 0.27%. By contrast, the lowest score of HH implies default odds of above 3.48%.
- Outstanding Balances – A table that breaks down the outstanding balances on all your credit facilities, from home loans to credit cards, and the associated lenders. This section also lists the payment statuses, such as whether you are current, overdue, or in default. It is important to check this section to ensure there are no errors, which might jeopardise your credit score.
- Default Records – Self-explanatory. What is important to note that default records will be displayed for three years, which tells you why maintaining a good credit score is vital.
- Previous Enquiries – The credit report doesn’t just state your credit facilities, it also lists out all your previous applications as well, including their status. If you’ve had a consistent history of being rejected by banks, it will show up on your report. The number of previous enquiries also influences your credit score.
- Bankruptcy Proceedings/Debt Repayment Scheme – This essentially just notes whether you are currently undergoing any bankruptcy proceedings or are part of the pre-bankruptcy Debt Repayment Scheme.
If you’re wondering where CBS gets all this data, the answer is from the financial institutions themselves. After all, credit reports exist to make things easier for the banks, which is why they willingly provide the data. This is also why it is so important that you strive to keep a good credit rating.
Why your credit score or rating matters to your home loan
According to government data, Singaporean banks receive anywhere from 10,000 to over 23,000 home loan applications each year. That is a lot of applications to process. As such, banks largely rely on several “key factors” to determine whether you qualify and the loan quantum they are willing to give you.
Your credit score is one of those key factors. If you have a poor credit score, you have a higher probability of getting your home loan application rejected. This can create a negative feedback loop. You get denied because of a low credit score, which shows up on your credit report. This lowers your credit score even more and increases your chances of getting rejected in the future! It’s a vicious cycle.
Furthermore, even if you do qualify, the maximum loan-to-value (LTV) ratio is likely to be lower. While there are strategies you can use to get a home loan despite a poor credit score, the most practical solution is also the most obvious—improve your credit score, or even better, make sure it doesn’t slip in the first place. And the first step to doing that is getting a hold of your credit report.
How to get a free Credit Bureau Report
There are several ways you can get your credit report from CBS—both free and paid. The free option is only available if you have recently applied for a new credit facility with any of the financial institutions that partner with CBS (which is most of them). After you receive your notification letter telling you if you are approved or rejected, you can—within 30 calendar days—get a free credit report from CBS.
Alternatively, you can pay $6.42 for it
The obvious issue with the free option is that you only get your report after you apply for a loan, meaning it’ll be too late to do anything about it. If you want to get your report beforehand, you will have to use the paid option. It’s not expensive—as of this writing, it only costs S$6.42, including GST. You can pay by MasterCard, Visa, or eNets.
To do this, simply go to this page, accept the terms and conditions, use your MyInfo details to apply, and then proceed with the payment. Also, keep a look out for promotions—sometimes, banks will “sponsor” the costs of the credit report (in exchange for you giving them your details for marketing purposes, of course).
Some tips on how to maintain a good credit score (or improve it)
To understand how you can maintain or improve your credit score, we must examine the factors that determine it. The main factors are your credit history—including length and payment promptness—as well as the number of enquiries.
Maintaining a good credit score is simple. Simply ensure you repay all your loans promptly and limit the number of open credit facilities you have. Improving a bad credit score is much harder—it can be done, but don’t expect any overnight solutions. A few tips to do so include:
- Not applying for multiple consecutive loans within a short time
- If you’ve never had any credit facilities before, start building your credit history. Getting a credit card and paying it in full at the end of the month is the simplest and safest strategy
- If you have a poor credit history, look at how you can consolidate your debt and begin paying it down
Will credit scores become even more important?
Although the use of credit scores is rather prevalent in Singapore, it pales in comparison to the US. Over there, credit scores are used far more widely, such as in determining prices of car and house insurance. And on top of that, in some states, they are even used as part of the employee screening process—a practice that has drawn quite a bit of controversy.
We can only speculate whether Singapore will follow in the US’ footsteps. But if we do, then it means that keeping a good credit score will only become more vital. So, don’t wait until you need to apply for a home loan before thinking about whether you need to improve your credit score (or what your score is). Do it today—as the saying goes, an ounce of prevention is worth a pound of cure.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.