4 Mistakes Which Cause A Bad Credit Rating For A Home Loan!

If you have ever applied for credit cards or any type of loan, you might be familiar with the term bad “credit rating”. But if you are new to managing your finances and tracking your money, take note that your credit rating is of much interest to a bank especially for a home loan application.

So, what is a credit rating?

A credit rating is a four-digit value in a numeric format that is based on a borrower’s creditworthiness. It is a key metric used by lenders to determine how worthy are you of getting a home loan and the likelihood of you being able to pay that home loan back timely.

In Singapore, credit rating range between 1,000 and 2,000 – the higher your credit rating, the more you are considered financially stable, and you can find your way to a new house, car or anything else you want a whole lot easier.

A credit bureau uses its own algorithm to calculate credit rating. Although the exact algorithm is not publicly known, we know what factors are considered by lenders to compute credit rating. The factors taken into account include payment history, credit utilisation ratio, age/duration of credit lines, number of credit inquiries made and a few others.

In Singapore, the Credit Bureau of Singapore (CBS) and the Experian Credit Bureau (ECB) consolidate and collect your credit history and repayment behaviour to provide comprehensive credit risk profiles to financial institutions.

Understanding the concept of credit rating and being aware of the common mistakes that can accidentally hurt your credit scores are crucial. This article will help the readers understand the most common misunderstandings borrowers have about credit ratings and how to avoid these pitfalls.

Why does a credit rating matter?

If you are planning to take up any form of credit or loan, be it applying for a housing loan, car loan, or thinking of pursuing higher education, you might need to finance your goal by taking assistance from a bank. When you submit a loan application to the bank, they will fetch your credit report from the credit bureau and check your credit rating to assess your creditworthiness.

Your credit rating isn’t just your ability to pay a loan back but it is more about your financial reputation for paying loans. You can check your credit rating with CBS for free if you have recently applied for a new credit facility with any financial institution (that is a CBS member) or you can simply pay $6.42 via MasterCard, Visa, or eNets to get your credit report.

For home loans, a good credit rating with CBS means a higher probability of having your loan application approved and getting the loan amount you hope to borrow. On the other hand, a poor or bad credit rating may get your loan application rejected.

If you are applying for an HDB loan and not a full-time employee with monthly CPF contributions, HDB will want to access your creditworthiness as part of the HDB Home Loan Eligibility (HLE) process. Although the HLE criteria does not primarily consider your credit rating, instead it takes into account your household characteristics, income level and previous HDB loans taken to date.

Mistake #1: Applying for too many credit cards or loans

We can’t blame you entirely for getting tempted to ‘cover your bases’ and apply for multiple credit cards or loans considering enticing credit card benefits or so-called “best home loan” deals offered by banks, but it could be the biggest mistake you can make. With too many credit cards or loans come multiple credit inquiries, which can make you look bad in the eyes of the lenders.

While there is no restriction on the number of home loans you can take up, it could take your credit rating down by a few points.

What happens is when you apply for credit, such as for a home loan, the bank will check your credit report to determine whether you meet their eligibility requirements or not. This will show up in your credit report and trigger a hard credit inquiry, which could temporarily lower your credit rating.

Although the damage probably won’t be that significant. But keep a note that multiple such hard inquiries could definitely hurt your credit rating.

Here are some recommended practices which you should abide by before submitting your home loan application:

• Wait for 3 to 6 months between your previous and next credit card or loan applications. Lesser waiting time than this between credit applications can trigger hard inquiries on your credit reports.
• Pick the lowest interest rate available on the market by comparing different lenders as even slight differences in rates can impact your repayment ability.
• Try consulting a mortgage broker to get the best advice on improving your chances of getting a new home loan. Try to learn what banks are looking for when reviewing a borrower’s credit application.

Mistake #2: Not using a credit card

The journey of managing your finances is complicated they say. And this pointer will explain to you why.

So while we now know that multiple credit cards can potentially hurt your credit score, completely avoiding credit cards could be a mistake too. By thinking that you are happy using a debit card and see no reason to get a credit card for yourself, you are making it difficult for the lender to evaluate your creditworthiness.

No credit cards mean a lack of credit history. If you have never had credit, there would be nothing on your credit report to show to the lenders, which means you will have a very low or zero credit rating. A borrower with a long-established credit history will always be favoured over someone with a limited or no credit history by the lenders.

So, taking that into consideration, you need to be smarter when using credit cards. A good idea is to get a credit card that offers incentives and benefits that match your lifestyle and spending habits. Instead, think of your credit card as a debit card; don’t spend more than what you have. And don’t get swayed over every freebie or promotion on offer by banks.

One thing that you can do is to have a list comparing the credit cards available and then choose amongst them, depending on your needs and what you can afford.

Mistake #3: Being late with payments

You got to hit the minimum repayment on a credit card or loan to avoid missed or late payment fees and other penalties. Missing out on the due date frequently with the minimum repayment will result in dragging your credit rating down and ultimately contributes to a poor credit history even if the bank waives your late payment fines. Your bank or lender will report the late payment to the credit bureau.

Since your payment history contributes 35% of your credit rating, any late payment is recorded in your credit report in a classified manner based on the duration of the delay. If you have missed a payment by 30 days or more, you will be considered ‘delinquent’. If you often incur late payment fees, you probably have a credit rating that indicates delinquency.

Late payments can last on your credit file for up to seven years and negatively impact your rating as long as they remain in your credit file.

A low credit score will also decrease your chances of getting any form of credit or loan in future. And even if you get one, you might have to pay higher interest rates for your lower credit rating. Also, it is not enough to just make your payments after getting late payment warning letters; you need to make sure you pay by the due date stated for late payments to not be held against you.

To avoid late payments, consider setting up autopay or payment reminders in your calendar so that you get timely repayment prompts and never miss out on a monthly repayment due to bad memory.

Always look at how to make your monthly payment more manageable. To survive the tough times, it is important to keep track of your spending and save for the rainy days. If you continuously make timely repayments, over the course of a year, your credit rating will also improve.

If you are a first-timer, it may also help to contact the bank and request them to waive the late payment fee. You need to call and inform your bank in advance and promise to never do it again.

Most banks are flexible to accept late payment fee waiver requests from customers with good records. While there is no guarantee that this will work, but if it does, you can get rid of this extra charge. 

Mistake #4: Defaulting on your loans

Simply put, defaulting on a loan means when a borrower is no longer able to timely repay a debt as per the initial loan arrangement.

In some cases, if you miss a payment or two, you incur late payment fees and your loan may be designated as “delinquent”, but you can return to good standing by making a full repayment with a specific timeframe. If you fail to repay in full as per the initial agreement, then you are officially in default.

A loan default will remain on your credit report indefinitely if it is written off and no attempt to bargain or settle it were made from your end. On the other side, if you made adequate efforts to settle the loan default and it is given the status of Negotiated Settlement or Full Settlement, in such a case, it will be removed from the credit report after 3 years from the date of settlement.

Defaulting on your loan may seem like an easy fix, but it can create problems that will have serious consequences that might also get in the way of your life goals. Although defaulting on a loan is not a criminal offence, it is a ‘mark’ on your credit history that can drastically damage your credit rating and impact your ability to receive future credit.

Defaulting on your loan contract comes with consequences. Falling into a default sends a red flag to banks and other financial entities tagging you as an ‘unreliable’ borrower.

Apart from the negative impact on your credit rating which may mean consequently losing out on loans, defaulting on your loans may lead to facing difficulties in future job prospects, legal consequences, or getting your assets seized. When all else fails, lenders send unpaid debts to debt collectors, which can create quite a nuisance.

Preventing default is less painful than fixing it after the fact. There are a few things you can try to avoid defaulting on your loan.

• You can contact your lender taking a proactive stance to figure out a potential solution to defaulting if you are struggling with repayments. This will demonstrate good faith as a borrower in the eyes of the lender.
• Rather than defaulting on your loan, contact your bank to lower your monthly repayments by modifying your mortgage repayment scheme through debt restructuring.
• You can also take assistance from a licensed credit counsellor with whom you can discuss your situation and get advice for alternatives to defaulting on your loan as per your financial situation.

How can I clear my bad credit rating?

Any major faults within the borrower’s repayment history or any pending legal issues can lead to bad credit. Bad credit history can significantly reduce your chances of getting a new loan. Even if you get one, you will be imposed with higher interest rates and more restrictive terms on loan agreements.

Already have a goofed up credit history that you want to fix? Don’t worry. With a little patience and dedication, you can clear your bad credit history in Singapore. Focus on improving your credit rating which can ultimately improve your credit grade quickly.

Here’s a table explaining the credit grading system in Singapore:

Risk Grade	Score Range	Probability of Default
AA	1911 to 2000	Less than 0.27%
BB	1844 to 1910	0.27% to 0.67%
CC	1825 to 1843	0.67% to 0.88%
DD	1813 to 1824	0.88% to 1.03%
EE	1782 to 1812	1.03% to 1.58%
FF	1755 to 1781	1.58% to 2.28%
GG	1724 to 1754	2.28% to 3.46%
HH	1000 to 1723	More than 3.46%

The good news is that it is up to you to clean up your bad credit history in Singapore. Here’s a glimpse of what you can do:

• Repay your credit bills or loans on time and in full;
• Never default on your payments;
• Limit your open credit facilities to no more than 2 or 3;
• Keep at least one credit card active;
• Avoid taking too multiple loans within a short time frame.

Want to learn more about what is a good credit score in Singapore?

Please note that there are certain credit grades such as GG, HH, HX, and HZ, which can damage your credit rating permanently. A few months of responsible prompt repayments can start seeing an improvement in your credit score.

While there is no precise way to predict how soon can you improve your credit score, our bad credit experts suggest it is possible to improve your bad credit score in as little as three months by following the above-mentioned tips.

Can I still apply for a home loan with a low or bad credit rating?

If you have a low or bad credit rating and wish to apply for a home loan, it is recommended to fix your score in advance.

While you might have to bear the brunt of a low or bad credit rating, other options can help mitigate the bad impact of your poor credit rating.

Apart from improving your credit rating, you can embrace other options too. Let’s take a look below.

Start with curbing your spending and trying to limit your expenditure. Doing this might help you to pay your repayments timely and show your lender that you have enough money to make consistent monthly repayments in future.

You should research to find lenders willing to lend you. Then compare and shortlist the most suitable lender among them offering you the best possible interest rates alongside other terms and conditions.

You can also send in an appeal to the credit bureau to explain your bad credit, for example, if you were in an unavoidable situation like a medical emergency that caused you to miss or delay your loan repayment.

Write to the credit bureau including all the possible details with correct dates, how the situation eventually resolved, and explain why such a situation won’t arise again or steps you have taken to cope with a similar situation in future.

Another tip is to have a co-borrower who can help you to get approved for a mortgage in the first place by improving your TDSR (Total debt servicing ratio). An ideal co-borrower would be someone with a high income, low debt and an AA (or at least BB) credit or risk grade.

Doing the above-mentioned things can help you apply for new loans and improve your low or bad credit rating. But bear in mind that the ball is still in the lender’s court. The lender’s decision of whether to offer you’re a loan or not will depend on many other internal factors.

Note that different banks have different risk appetites and that is why they consider different assessment criteria while evaluating each borrower’s creditworthiness. One bank may find your credit rating unacceptable as per their loan eligibility standards while another bank may approve of it based on their assessment criteria.

Mostly, the credit rating eligibility and risk profile may vary from applicant to applicant and bank to bank. But note that submitting loan applications simultaneously to multiple banks or lenders can trigger multiple “hard” inquiries to drill you deeper into bad credit.

Final Thoughts

Having a low or bad credit rating is not the end of the world as long as you are working towards improving it. While bad credit can make it difficult to get loans or credit facilities in future, there is always a chance to clean the bad rating. A credit rating by no means is a static number and will change if you actively work towards improving it.

If you facing bad credit issues or need help finding the best home loan as per your financial situation and credit history, you can get in touch with one of DollarBack Mortgage’s mortgage consultants for advice at no additional cost.