This article is contributed by Credit Bureau Singapore.
“Credit” generally refers to the ability to borrow money or access goods and services with a promise to pay later. Paying on credit terms can come in handy during cash-tight periods when you are in need to pay off a big-ticket item. However dire financial effects can happen if you abuse the use of credit and do not use it responsibly.
What are the common types of credit and loan facilities available?
Credits can be split into Secured and Unsecured lending. Secured credit will usually require you to pledge a collateral where typically the amount borrowed is dependent on the value of the collateral. On the other hand, unsecured will not require a pledge of collateral but the credit limit is usually largely determined by the individual’s annual income and other factors.
Common unsecured credit facilities in Singapore’s market are credit cards, personal loans or overdrafts. These are revolving credit that allows the borrower to continue to use a certain limit without additional interest charges. An individual is only assigned with a maximum amount of credit limit that he is able to utilise from, the available credit limit will decrease as new purchases are transacted onto the credit account. Interest will be charged onto the credit facility for any unpaid outstanding balances.
Secured loans are usually disbursed in a lump sum and repaid in fixed monthly instalments with added interest over a longer period of time. Typically, secured loans are used for big ticket items that is not easily repaid using cash. Common secured loans found in Singapore are Mortgage Loans and Motor Vehicle Loans.
Why You Should Not Over Borrow
Borrowing beyond your means can leave you struggling financially as you go further into debt. Consider all the other existing loans that you have and understand your financial standing before applying for additional loans. Do not borrow for the sake of repaying another debt as you may risk falling into multiple, bigger debts which makes it even more difficult for you to repay in the future. It is also important to do ample research and clear any doubts with the lenders before you agree to take up any new credit/loan facilities.
Your repayment records are consolidated under the CBS Consumer Credit Report. Maintaining a good credit reputation can make it easier and faster for you to obtain loans in the future as well, especially when you need urgent cash in unforeseen situations like - paying for big hospital bills.
Tips to Using Credit Responsibly
Instalment Payment Plans (IPP). IPPs might give you a false perception that you can easily repay back your bills and lead to impulsive buying. It is important to be practical and to spend only what you can afford so you do not end up buying things that you do not need. You should avoid relying too heavily on making all of your purchases through IPP, as you might unintentionally overlook your own financial capacity.
Pay your bills in full and make timely payments. Some credit facilities allow consumers to make only a minimum repayment. However, this means your outstanding balances will accumulate together with high interest charges. Making only the minimum payment will have a detrimental effect on your credit score and have a long-term negative impact as you struggle to pay off your outstanding bills on top of the high interest charges.
Terms and conditions. Take a moment to read through the terms and conditions before you sign yourself up for any new credit facility. Be well versed on the penalty charges and interest-free repayment periods so you can have a smoother debt repayment journey. For example, if you are planning to refinance your housing loan, always check your lock-in period expiry date. Some home loans that are beyond the lock-in period will tend to have a spike or surge in interest rates.
Over applying for loans and exceeding your credit limit. Some banks or credit card issuers allow you to spend beyond your assigned credit limit with an over limit fee. You should be mindful of the repercussions if you have a habit of maxing out your credit limit, especially if you are unable to pay back the full amount on time. However, some banks might grant you special credit limit increases if you need to make a large transaction urgently. Alternatively, you can also request your bank to lower your credit limit if you have a tendency to overspend on your credit lines.
Where can I get a copy of my credit report?
To check your credit score, you can purchase a copy of your credit report at https://www.creditbureau.com.sg/.
