What is a Credit Rating, and Why Should Singaporeans Care?

A bad credit rating has a more serious impact than you realise. We explain what a credit rating is, and why you should keep it as close to AA as possible.

Unknown to many Singaporeans, a credit rating makes a lot of impact on daily life. Your ability to get loans and credit cards in Singapore depend on a healthy credit rating. Even the job opportunities available to you are influenced by your credit rating.

We explain everything you need to know about credit ratings in Singapore, and why you should care about your score.

What is a Credit Rating?

A credit rating is used by banks and financial institutions to evaluate your as a risk - the worse your credit rating, the higher the chance you will fail to pay back your loans. Your ability to get a loan, as well as the size of the loan you get, is dependent on how good your credit rating is.

In some other countries, the interest rate of a loan is also dependent on your credit rating (the higher a risk you are, the higher the interest you’re charged.) This generally doesn’t happen in Singapore - if you have bad credit here, you are either denied the loan, or asked to take a smaller loan.

Your credit rating is based on a score between 1,000 (the worst) and 2,000 (the best). The score generates a credit grade, from AA (the best) to HH (the worst.) When banks are considering your loan application, they usually look at the grade and not your exact score.

However, in some circumstances, the score will determine your loan approval. An example is when you are just one or two points short of having an AA credit rating.

You can obtain a copy of your credit report from the Credit Bureau of Singapore (CBS) for an administration fee of around S$6.

Why Should I Care About My Credit Rating?

Your credit rating affects your ability to get crucial loans. For example, when you apply for a housing loan (whether from the bank or HDB), your credit score is the first thing checked by the lenders.

A poor credit score will lower the Loan-to-Value (LTV) ratio. So while most people can borrow up to 80% of the value of their house, people with poor credit may only be able to borrow up to 60% of the value. So for a S$400,000 flat, this can mean forking out an additional S$80,000 in cash.

If your credit grade is CC or below, your loan application may be rejected completely.

The same problems will arise with car loans, education loans, and business loans - you will have to save enough to pay for these in cash if you cannot take a bank loan. In this sense, a poor credit rating can deprive you of being a degree holder, the possibility of business ownership, or driving your own car.

Another problem with a poor credit rating is employment. While employers cannot check your credit score directly, they may ask you to present a credit report to them. This is especially true if you will be involved in fields like finance, law, or politics, where a poor credit rating can mean being refused job positions.

Poor Credit is More Trouble Than It’s Worth

A bad credit score deprives you of opportunities and makes life significantly harder. It is also difficult to repair a damaged credit score, as the only way is to gradually pay back your loans - it can take years of repayments to make up for a three or four missed repayments.

Try to keep your credit score healthy by using tools like balance transfers or personal loans (to repay more expensive credit card loans), and keeping your spending to a minimum.