How Debt Consolidation Can Improve Your Credit Score Over Time

While maintaining a good credit score is ideal, sometimes we fall into financial cracks that result in an overwhelming amount of debt. To improve your financial situation, debt consolidation may be imperative to turn things around. 

But does it affect your credit score in the near future? Yes, because when you consolidate your unsecured debt, some or all of your unsecured accounts will either be suspended or closed (depending on your chosen bank’s loan sum approved). The balances of the affected accounts will then be under a single debt consolidation loan account. 

It will be a financial marathon to get a better credit score – your credit score may climb up the scale to better ratings in time. The account repayment history on the Credit Bureau Singapore (CBS) report will reveal repayments for the past 12 months on a rolling basis. As long as your repayments are always punctual, your credit score can improve. 

Options for debt consolidation:  

• Balance transfers for credit cards
• Personal loans
• Debt management plans

Your credit score is essentially a unit that shows where you stand in your personal credit history. Current loan repayments are crucial to your credit score. 

In Singapore, the CBS  scores a person’s credit rating in a range from 1,000 to 2,000. The lower the score number, the higher the likelihood it is for a person to default their credit payments. For instance, from 1,000 - 1,723 (HH rating) implies a higher chance to default credit payments, while scores between the range of 1,911-2,000 (AA rating) implies a lower percentage to default. 

Lenders use your credit score and other factors (i.e. your employment period, annual income, etc.) to determine if they should approve or decline your loan application. 

The CBS report includes:

• The number of credit facilities under your name
• Personal details and address
• All the credit facilities listed, along with your repayment activity for the past 12 months
• All enquiries lenders made in relation with loan applications (up to 2 years from the enquiry date) 
• Default records
• Your credit score rating (ranges from AA to HH)
• Debt Repayment Scheme (DRS) records
• Aggregated outstanding balances

Curious on what your credit score is like? Here’s how you can get your hands on your individual credit score copy. 

There are three ways to get a copy of your credit score report.

#1: Credit Bureau Singapore (CBS)

Purchasing a copy from the CBS website will cost you S$6.42 as well as S$2 for multiple delivery options.

#2: SingPost branch 

Alternatively, you could pay S$17.12 for a hardcopy which will take 2 hours to process.

#3: Credit application

If you’ve recently made a credit-related application with a financial institution registered in the CBS, you are entitled to obtain a free credit score copy.

According to Credit Counselling Singapore, a debt consolidation plan provides individuals an opportunity to consolidate unsecured debts (personal loans, credit card debt, and such) across their financial board to a single financial institution. However, this doesn’t include joint loan accounts, business-related credit facilities, renovation loans, education loans, and medical loans.

The following criteria must be met to be eligible for a debt consolidation plan:

• A Singaporean citizenship or permanent residency
• An income of S$30,000 to below S$120,000 per annum and Personal Net Assets below S$2 million
• Total interest-bearing unsecured debt that goes beyond 12 times of his or her monthly income

Debt consolidation plans are regulated under the Monetary Authority of Singapore, so your application needs to go through the same process as that of a regular loan application.

Application process

The Association of Banks in Singapore currently lists 14 banks that offer debt consolidation plans:

• American Express
• Bank of China
• CIMB 
• Citibank
• DBS
• Diners Club
• HL Bank
• HSBC
• ICBC
• Standard Chartered Bank
• Maybank
• OCBC
• RHB
• UOB 

You will need to submit the relevant income documents for the application, such as:

• A copy of your NRIC (both front and back)
• Latest income documents
• Credit Bureau Report
• Latest statements for your credit cards and unsecured loans 
• A confirmation letter stating the unbilled principal balances for unsecured credit instalment plans (if they apply)
• Any other relevant transactions which may not reflect in your statements

As mentioned, existing unsecured credit facilities with other financial institutions are either closed or suspended when a debt consolidation plan is approved. The financial institution which manages the plan will provide you with a revolving credit facility, which is valued at a month’s worth of the applicant’s income. 

Here are the debt consolidation plans we offer, with interests ranging from 3.4% p.a. to 6% p.a. (EIR applies). Some banks offer loan tenures for up to 10 years. Check to see if zero processing fees apply.

When your debt consolidation application is approved, your bank will provide your loan tenure and loan amount.

If you are applying for the first time, the amount would include the total outstanding balance with a 5% allowance. The purpose of this allowance is to sustain any accidental fees, charges, or interests accrued within the valid time frame – from when your debt consolidation plan is approved to when the loan amount is distributed to the lenders you owe.  

In case you don’t receive the full sum to clear your total outstanding balance, you would need to cover the shortfall with your remaining creditors. 

You may settle your debt consolidation plan earlier than the loan tenure, but check with your financial provider if there is an early termination fee.

You may apply for a new unsecured credit facility once you’ve brought your debt consolidation limit down to or below eight times your monthly income.

Yes, you may actually refinance your current debt consolidation plan with another bank as early as 3 months after your current plan was approved. But remember, you may be subject to a penalty fee due to the early termination of the plan.

Yes, it will. Your credit score record would reflect your debt consolidation plan product code for an unsecured credit product. This will be in your records until three years after the loan settlement, as with other credit products on the CBS report. 

When your debt consolidation plan has been approved and disbursed, you need to cancel your previous repayment arrangements. Ensure that your subscriptions and bill payments are adjusted accordingly.

The ultimate goal is to stay out of a debt spiral, and in the long run, see your credit score hit that AA grade. A debt consolidation plan can work in your favour, as its low rates help clear the red on your ledger.

As you go on a debt consolidation plan, it’s important to reflect on your spending habits, and to find ways to cut down on expenses. Learning to handle your finances is a good skill to develop, seeing that the cost of pretty much everything is hitting all-time highs. Learn more on how to budget better in our article on 5 Tips To Better Plan Your Budget in a Post-COVID World.