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  • Writer's pictureFinancial Fortress

Mistakes to Avoid When Building Your Credit Score

Updated: May 9, 2022

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Are you planning to take out a home loan to purchase your dream house? Or perhaps you’re getting married soon and need some financial help with the wedding?

Either way, you’re going to need a high credit score when applying for any type of loan for banks to take your application seriously.

From credit cards to personal loans, your credit score determines the success of your loan application in Singapore. It’s a crucial tool that measures how much money you’re going to get, or if any at all.

For today’s article, we’re going to talk about the common mistakes when building a credit score in Singapore. These are the steps to avoid if you want to increase the chances of your future loans getting accepted!

Let’s start with what exactly a credit score is and how it’s calculated.


What’s a credit score?

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A credit score is a 4-digit number dictated by your credit history that reveals to banks how reliable you are at paying your debts. It ranges from 1,000 to 2,000, with the latter being the highest score.

It’s basically a summary of your credit history across different banks and financial institutions. The higher your credit score, the better your chances of getting the loan you applied for.

A high credit score can be even leveraged to negotiate for more favourable interest rates and flexible payment terms!

How is credit score calculated?

In Singapore, credit scores are calculated by an algorithm that monitors your use of credit. The algorithm is kept confidential, so we can’t say for sure what the calculation process is.

But certain behaviours will definitely make a dent in your credit rating. Read on to find out (and avoid) what they are!

1. Multiple loans and credit cards at once

Financial Fortress_Close up of credit card

Using credit cards responsibly and paying dues on time is an easy way to build your credit score.

Here’s a friendly reminder, though: be careful with owning multiple credit cards as most banks and financial institutions consider it a red flag. The more money we owe to banks or someone, the lower our credit score will be.

It’s worth noting that the number of open accounts matters as well! Maybe you don’t owe huge amounts to banks, but owing small amounts across multiple accounts is still a bad look!

This explains why it’s never a good idea to own more than 2 credit cards at once. It’s hard enough to keep track of a single billing cycle, more so if you add another one.

The same rule applies when you take out multiple loans within a short period. Banks will assume that your financial situation has taken a turn upon knowing you’re paying off loans one after another.

Here’s another friendly reminder: when applying for loans, work out how much you need first and take it out on a single loan. That way, you won’t end up shorthanded and realise you need to take out another loan.

2. Loan and credit card applications in succession

Financial Fortress_Stressed young woman calculating monthly home expenses, taxes, bank account balance and credit card bills

Another red flag for banks is when someone applies for multiple credit lines at once. Each time you apply for a new credit card or loan, the financial institution involved will enquire about your credit history with the Credit Bureau Singapore.

If found that there are multiple enquiries under your name at once, your credit score will drop and your application will likely be rejected as you’re assumed to be facing some kind of financial difficulty.

Try to wait a month before applying for another loan after getting rejected, so you don’t get labelled as “credit hungry.” It’s never a good look to apply to different banks at the same time to increase your chances of getting accepted as it will only make you look desperate.

3. A high debt-to-income ratio

Financial Fortress_Income more than debt concept

The best financial planning tip to avoid falling into debt is to set a monthly budget according to your needs and don’t live beyond your means. Spending more than what we’re earning in a month will only drown us in more debt than we can handle.

A high debt-to-income ratio is a common reason why credit scores drop in Singapore. To calculate this ratio, divide your monthly debt repayments by your monthly take-home salary, and then multiple by 100.

Formula for debt-to-income ratio

You should always aim for a low debt-to-income ratio if you want to keep your credit score healthy!

Lastly, there’s no other way to lower your ratio than by working on eliminating outstanding debts first before thinking of making huge purchases again.

4. Late and default payments

Financial Fortress_An overdue bill sitting with a piggy bank on a calendar, Behind on your bills

No question that being behind on your credit card payments hurts your credit score. We know it’s hard to always be on time when settling credit card bills, which explains why most working adults have a history of late payments.

To avoid forgetting to pay your credit card dues, the best tip is to automate the payments through your debit card or bank account.

The good news is, the negative credit score from late payments can be mitigated in less than a year, so no worries about paying late once.

However, defaulting on your credit card will tarnish your credit history for about 3 years or so, which will have a massive effect on your credit score.

5. No credit history

Financial Fortress_Credit history report papers and pen.

Having no credit doesn’t mean you’re off the hook! Some people assume that the best solution to avoid a low credit score is to never open a credit card or apply for a loan.

The problem with this is that banks and financial institutions have no way of knowing your credit history and how diligent you are in repaying your debts, which is also not in your favour.

So the best way to start building your credit score is by taking out small loans and applying for low-reward credit cards as they are generally easier to pay.

Building a debt-free life

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Whether for personal reasons or even medical emergencies, it’s likely that for most of us we’ll need to apply for huge loans at some point in our lives.

To have a successful loan application in the future, we need to take care of our credit scores as early as now by settling our dues on time, or by simply living within our means.

If you want to learn more about credit scores, or simply need asset management or wealth management tips, feel free to get in touch with us! We can connect you with experienced financial planning experts who can help you achieve a higher credit score.


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