Did you know that your credit score can affect the ability to get loan applications approved?
Not many of us can afford and pay off big-ticket items in cash and would have to take on a bank loan to buy a house, car or set up a business. Having an AA risk grade not only makes it easier to qualify for a loan, but it can also help save you a substantial amount of money in terms of interest over time.
If you are looking to take on loans but have a lower-than-ideal credit score, here are some methods to help bring up your rating.
What is a credit score? Why does it matter?
A credit score is a four-digit rating based on the credit history that indicates how likely you are going to repay your debts and the probability of you defaulting on a payment.
| Risk Grade | Score Range | Probability of Default |
| AA | 1911 – 2000 | 0.00% – 0.27% |
| BB | 1844 – 1910 | 0.27% – 0.67% |
| CC | 1825 – 1843 | 0.67% – 0.88% |
| DD | 1813 – 1824 | 0.88% – 1.03% |
| EE | 1782 – 1812 | 1.03% – 1.58% |
| FF | 1755 – 1781 | 1.58% – 2.28% |
| GG | 1724 – 1754 | 2.28% – 3.46% |
| HH | 1000 – 1723 | 3.46% – 100.00% |
The higher your credit rating, the lower risk of default. Individuals with better credit scores are considered lower-risk borrowers and therefore can enjoy better interest rates and benefits from banks.
On the flip side, a poor credit rating implies that you lack money management skills. Hence, you are more likely to be rejected or given a smaller loan when applying for one. Moreover, some employers might even turn down applicants with bad credit scores.
What causes a bad credit score?
Before we dive into how to improve your credit score, it is first important to understand the factors that can negatively impact your ratings.
- Account delinquency: late payments on loans can reduce your credit score
- High credit utilisation rate: using a large percentage of total available credit
- Short Credit history: not enough credit history to establish a good credit score
- Too many enquiries: applying for multiple loans at a time
- History of bankruptcy: filing for bankruptcy causes the most damage to your ratings
Repay loans on time
One of the fastest and most effective ways to improve your credit score is to avoid late payments.
A common misconception among credit card holders is that delayed payments are fine as long as the late payment fees are paid. Missing a payment for more than 30 days automatically puts you in the delinquent category which causes your score to dip in the long run.
If you are unable to repay your dues on time or think that you might miss the deadline, make sure to inform your bank ahead of time. Asking for alternative repayment schemes can minimise the damage dealt to your credit score.
Tip: Automate your credit card bills so that you can make sure that you always pay on time. Alternatively, you can opt for reminders from your card issuer that will prompt you to make timely payments.
Read more: 10 Pointless Purchases To Stop Spending On
Optimise your credit utilisation
General guideline: Try to stay within 30% of your credit card limit with the ideal being 10% or less.
Credit utilisation refers to the balance you owe relative to your credit card limit. Let’s say you currently have a $200 credit card balance on a card that has a credit limit of $1000. Your credit utilisation rate would be 20%.
Having a low credit ratio is highly beneficial for your credit score as it shows that you have control over your finances. Hence it is strongly encouraged that you frequently pay off your balance to keep it as low as possible.
Tip: Use your credit card’s alert feature to better keep your credit utilisation in check.
Increase your credit limits
While this may seem like it contradicts what you are trying to achieve, a higher credit limit can boost your ratings if your balance stays the same. This is because your overall credit utilisation ratio would be lowered, providing a boost to your credit.
There are two ways to increase your credit limit:
- Request for an increase of the overall credit limit
- Open a new credit card
The downside to this is that with a higher credit limit, the onus is on you to spend responsibly. If you are someone who buys on impulse or gets tempted to spend more than you can afford, we would not recommend using this method.
Before you open a new credit card, review your recent financial activities. Check to see if you have just opened another card or taken on a loan recently. The frequency of opening an account is also factored into your credit score which brings us to the next point.
Keep credit inquiries to a minimum
Every time you apply for a loan or credit card, an inquiry into your credit report would be triggered to access your creditworthiness. Making multiple inquiries within a short period sends the wrong signals to the bank as they deem you “credit hungry” or desperate for funds.
Having multiple credit facilities also puts you at risk of over-extending yourself on top of the increased difficulty of having to keep track of different billing cycles. To avoid this, plan out your application and spread them out strategically. Not only will it increase the chances of approval, but it also helps to maintain your credit score.
Myth debunked: Credit checks initiated by you or companies for background checks are considered soft inquiries which will not affect your credit score.
Monitor your credit report and dispute inaccuracies
Any mistake on your credit report can quickly pull down your overall rating. If you find any discrepancies or disagree with some information on your report, write to the credit bureau about it. Credit bureau is the agency that collects and stores records of your credit history.
Upon receipt of your request, the bureau will process it and carry out an investigation based on the information provided. You will be informed of the outcome and if there is any rectification, your credit report would be amended.
Unlike the previous methods, the impact of disputing report errors varies based on various factors including your credit history and the severity of the error. While it can take some time to go through your report, it is worthwhile, especially for those who are trying to build up their credit for a large loan in the near future.
How long does it take to rebuild my credit score?
If you have over-extended yourself and caused a dent in your credit score, the good news is that it is fixable as the impact of delinquent payments fades over time.
If you can consistently carry out the above-mentioned techniques, you will definitely see improvements in your ratings. The time frame, however, ranges from immediate to a few months depending on the damage dealt.
Read more: Bad Habits to Avoid With Your Credit Card
Conclusion
Once again, a healthy credit score is reflective of how responsible you are when it comes to personal finance management. If you find yourself with a low rating, it is best to start to remedy the situation as soon as possible. The problem will only worsen the longer you drag it out.
Do also note that default and bankruptcy tend to stay on your credit report for a longer period of time which can bring about many challenges should you want to take on loans in the future. Hence, it is advisable to keep a close tab on your credit spending to prevent it from spiralling out of control.
Lastly, if you constantly find yourself in this situation, here are some bad habits to avoid with your credit card.
