All about Credit: What Is a Credit Score and How Can I Improve It?

You are here, you probably own a credit card, or you are planning on getting one. Well, you have a few things to learn first.

What is a credit score? You ask. And what is a good credit score?

Well, while different lenders have their own standards for rating credit scores, 700 and higher (on a scale of 300 to 850) is generally considered good.

Lenders typically use your 3-digit credit score to help them decide if they’ll approve you for a loan or credit card. In general, the higher your score, the better your chances of getting approved. Having a good credit score can also help you save on interest rates.

Of course, a specific score doesn’t guarantee that you’ll be approved for credit or get the lowest interest rates, but knowing where you stand may help you determine which offers to apply for – or which areas to work on before you apply.

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Desirably, you can improve your credit score if you have a good credit history.

What is credit history?

A credit history is an account of how you’ve used your credit over the years. This, in turn, shows your responsibility in repaying your debts. Banks use this history to determine whether you’ll be likely to make payments on time or not.

The problem with the Philippines, however, is that there’s still no centralized credit reporting in the country like there is in the US, where 300 is a bad credit score and 850 is the best.

Because of this, most big banks either rely on an internal database (record of past and existing clients’ handling of both lending and deposit accounts) or external sources. The most common external sources are the Bankers Association of the Philippines Credit Bureau or the CCAP C4 (Consolidated Cancelled Credit Cards) negative file.

How can you have a good credit history?

  1. Start building a good credit history early. Having a credit card and making regular payments on it is one of the easiest ways to build your credit history and reassure banks that you’re a good credit risk. Check out these starter credit cards and start building your credit history ASAP. But you have to be disciplined and pay it off every month (or at least a huge chunk of it so you lessen the interest you have to pay).
  2. Don’t miss payments. Remember that banks are looking at your past usage or credits. A good track record of several years with no missed payments on due date means you are a good, responsible credit card owner. Indeed, paying on time is one of the biggest contributors to your credit score. Simply making payments on time will have a good impact on your history.
  3. If you’ve missed payments, get back on track. Let’s face it, sometimes, missing payments is unavoidable. Banks know that. But catch up with payments as soon as you can to lessen the bad effect it has on your credit history. If your overdue accounts don’t exceed 30 days,this is usually interpreted that missed payments were unintentional, forgot the due date or did not receive billing statement on time  and your credit history will remain good. Got it?
  4. Keep debts low. Having a lot of revolving debt reflects badly on your credit history. Reduce your debts — in the US and even here in the Philippines, it’s recommended that you keep your debt-to-credit ratio at 30%. Meaning, if your credit limit is P100,000, your balance should be P30,000 or less.
  5. Keep all of the good work up. Having a good credit history isn’t a quick fix. You’ll need to be consistent, and to keep up your good credit behavior over many years.

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How can I improve my credit score?

Want a better credit score? Worry not, you can improve it. In this section, we will cover all bases, so pay close attention. Bookmark this page if necessary.

1. Get a Credit Card Early and Use it Responsibly

Getting a credit card ASAP is one of the best ways to demonstrate to banks how financially responsible you are. Make a good impression by using your credit card to make purchases that you can pay off on time. It’s also a good idea to have a buffer in your credit limit just in case you need to divert funds elsewhere. You can also try Secured Credit Cards just to start building your credit history and credit score.

2. Avoid late payments

There will be times that you won’t be able to pay your monthly dues–may it be due to emergencies, financial incapacity, or even just forgetting to pay altogether. Make a habit of paying your bill early, or better yet, pay it twice a month.

3. Pay off debts or keep them to a minimum

Obviously, paying off previous debts can help improve your credit score, but if settling all your balances in one go is impossible at the moment, then you should at least keep it to a minimum or manageable amount.

It’s not just about how much you owe, either; it’s about how much you owe compared to your credit limit. For instance, an P18,000 balance from a P25,000 credit limit gives you a total credit utilization of about 75%, which is still a big number.

There are also services that let you consolidate your credit card debts into one account so you can pay them off more easily.

For example, the 0% Balance Transfer lets you transfer credit card balances with high interest into a credit card with a lower rate, which will help you save money and pay your debt faster. You can transfer balances from pretty much any credit card in the Philippines including your BDO credit card, BPI credit card, Citibank credit card, or Metrobank credit card.

4. Don’t exceed your credit limit on any of your existing cards

Carrying a balance that is higher than any of your existing credit limits is a red flag for most banks and can cause your credit score to dive. This balance typically includes interest payments so if you’re nearing your credit limit and can’t quite pay your required balance, consider converting big transactions to installments.

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5. Request for a raise in your credit limit

If you really can’t pay off your total debt, then you can ask the bank to increase your credit limit. Since credit reports are based on percentages, a higher credit limit will typically result in lower credit utilization, assuming your expenses remain in the same range.

Going back to the previous example, an increase in credit limit to P50,000 from P25,000 will bring the same P18,000 balance you had down to just 30%. It’s a significant improvement and one that should improve your credit score. Just remember that banks won’t increase your limit if you’re already over credit limit or delinquent.

Sources

Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/moneybuilder/2014/05/02/11-ways-to-raise-your-credit-score-fast/#3c34f60d4bd7 [Accessed 19 May 2017].

Papadimitriou, O. (2016). How to Improve Your Credit Score (and How Long It Will Take). [online] WalletHub. Available at: https://wallethub.com/edu/improve-credit-score/19579/ [Accessed 19 May 2017].

MagnifyMoney. (2014). 6 Simple Steps to Improve Your Credit Score. [online] Available at: http://www.magnifymoney.com/blog/building-credit/6-simple-steps-to-improve-your-credit-score1106518423 [Accessed 19 May 2017].

Geldis (2017). 11 Ways to Improve Your Credit Score – Credit.com. [online] Credit.com. Available at: https://www.credit.com/credit-repair/how-to-improve-credit-score/ [Accessed 19 May 2017].

Experian.com. (2016). How to Improve Your Credit Score | Experian. [online] Available at: http://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/ [Accessed 19 May 2017].

Dratch, D. (2017). 7 Simple Ways To Improve Your Credit Score | Bankrate.com. [online] Bankrate.com. Available at: http://www.bankrate.com/finance/debt/7-simple-ways-improve-credit-score-1.aspx [Accessed 19 May 2017].

myFICO. (2017). Improve Credit Score: Tips to Fix Poor Credit & Raise Your FICO Score. [online] Available at: http://www.myfico.com/credit-education/improve-your-credit-score/ [Accessed 19 May 2017].

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