A credit score may not be as widely talked about in the Philippines as in other countries, but its importance can't be underestimated. Your credit score spells the difference between getting approved and declined for a credit card or loan.
Unknown to many, there's an established credit information system in the Philippines through Republic Act 9510. This enables lenders to assess a borrower's credit risk and decide how much to lend and at what interest rate.
A critical factor in a lender's credit decision is the credit score, which is computed based on a borrower's payment history, types of credit used, and new accounts opened, among other criteria. Your financial habits cause your credit score to go up or down, affecting your chances of hitting your goals, like starting a business or buying a home or a car. Keep a good credit score by breaking any of these bad money habits.
1. Making Late Payments
Your credit payment history makes up 35% of your credit score. This includes late payments on your loans, credit card bills, and insurance premiums, as well as the amount and frequency of your payments.
Procrastination is bad for your finances. The longer you delay your payments, the worse your credit score will be. Make sure to pay your balances on time and without fail.
2. Defaulting on Your Loan
Consistently missing your loan payments—or avoiding them altogether—has serious consequences on your credit history. Not only will you lose your car through repossession or your home through foreclosure, having a loan default will surely hurt your credit score and keep you from getting approved for another loan in the future.
3. Stopping Your Credit Card Payment
Unpaid credit card balances can damage your credit score as much as a loan default does. You'll get a negative hit on your credit history when your overdue credit card bill is unpaid for 90 days or longer.
4. Maxing Out Your Credit Card
Even if you pay off your monthly credit card balance, your credit score will still drop if you often exceed your credit limit. This is because your credit utilization ratio, or the amount you owe divided by your credit card limit, accounts for 30% of your credit score. A maxed-out credit card increases this ratio.
To increase your credit score, use only a small percentage of your credit limit, ideally at 30% or lower. Resist the urge to overspend with your credit card so that you won't incur a higher balance than you can actually afford to pay.
5. Making Credit Card Cash Advances
An easy way to go beyond your credit limit—and get a bad credit score—is to make frequent cash advances on your credit card. Before you withdraw cash on your card, consider its risks. A cash advance increases your credit card debt, which will reflect on your credit history and pull down your credit score.
6. Closing Your Credit Card
Closing a credit card account can negatively affect your credit utilization ratio and cause your credit score to drop. But it may help you manage your finances better in certain situations. If you want to avoid racking up debt, the credit card is costing you too much money, or its terms aren't favorable to you anymore, then you're better off closing your card than letting your bills pile up unpaid.
If you must cancel one of your credit cards, be strategic so that its impact on your credit score will be minimal. Don't close a card until you've paid off the balances on all your cards to lower your credit utilization ratio[1]. Never make the mistake of canceling an account with an unpaid balance, as this will show up in your credit report.
Avoid closing your oldest credit card, especially if you're a millennial who hasn't built a solid credit history yet. The length of your credit history, which includes the age of your credit card account, makes up a percentage of your credit score. So it's better to keep your oldest card account open and cancel a newer card with the highest annual fee or interest rate.
7. Not Using Your Credit Card At All
Leaving your credit card unused won't automatically harm your credit score. But if it's been inactive for a very long time that the bank decides to close your account, then that will shorten your credit history—which accounts for 15% of your credit score.
Use your credit card at least once per month and pay off the balance on time. This way, you can maintain a good credit score and keep your card active without having to use it often.
8. Applying for Multiple Credit Cards or Loans
When computing your credit score, credit bureaus also factor in the new credit card or loan accounts you've applied for and opened. New credit accounts make up 10% of that score.
Each time you apply for a credit card or loan, the lender makes a request to access your credit report. Multiple credit card or loan applications within a short span of time can lead to numerous access requests on your credit record, which lowers your credit score. This raises a red flag for lenders, as you're seen as someone with cash flow issues who's desperate to get a new card or loan.
Applying for multiple credit cards or loans at a time, even if you just want to get the best rates, is bad for your credit score. It's recommended that you apply for the best financial product for your needs and raise your chance of approval. Before you apply, compare the options available to determine the one that suits you best. For that, you can use MoneyMax.ph for free to compare credit cards, personal loans, auto loans, and other financial products in the Philippines.
9. Ignoring Your Credit Score
Where do you currently stand with your credit score? Be on top of it. Make sure yours is good (ranging from 680 to 850) and that your credit report has no errors.
The first step is to check your credit report and credit score. You can access a free copy of your credit report once every year through the Credit Information Corporation (CIC)[2] or one of its accredited bureaus (CIBI,
Compuscan Philippines, CRIF Philippines, or TransUnion Philippines). The credit bureaus also offer credit scoring as a service for a fee. They compute credit scores based on credit reports from the CIC.
If you find any error or inaccurate data in your credit report, contact the concerned bank or lender to correct and update your record. This will help clear up your credit record and improve your credit score.
Final Thoughts
Meeting your financial goals depend on your creditworthiness, which your credit score represents. Pay attention to your score and break your habits that can damage it.
(Photos from Freepik.com and Pixabay)
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