How to keep good credit (and why you need it)
The older you get, the more you’ll realize that building good credit behavior is essential for future financial stability. Good credit opens doors to lower interest rates, higher credit limits, and easier access to loans and credit cards. It’s good credit that will help you with life-changing purchases like a car and a home.
But what is good credit exactly? And how do you build it? In this article, we’ll unpack a personal finance topic that Pinoys should probably talk about more: credit scores — what it means, how it’s computed, how you can build good credit, and the benefits you can reap.
What is a credit score?
Your credit score is a crucial three-digit number that represents a person’s credit worthiness. It is an indication of the person’s likelihood to repay his debt. Financial institutions use this as part of the process in deciding on whether to approve a credit card or loan application.
In the Philippines, entities like the Credit Information Corporation (CIC), TransUnion, CIBI provide credit scores. Many banks will likewise have their own proprietary score cards.
As the centralized registry of credit data in the Philippines, the CIC plays a vital role in collecting, consolidating, and sharing credit information with various financial institutions across the country. These institutions, including banks, cooperatives, insurance firms, and telecom companies, provide the CIC with their clients' credit histories, which are then compiled into detailed credit reports. Authorized lenders can access these credit reports to make informed decisions about potential borrowers.
What factors influence a credit score?
There are three credit bureaus or Special Accessing Entities or SAEs accredited by the CIC:
- CIBI Information, Inc.
- CRIF Philippines
- TransUnion Philippines
They compute credit scores based on five key criteria: *Influence percentages from TransUnion Philippines and may vary
Payment Behavior/History (35% influence*): This factor reflects how consistently you repay debts, the amount you repay, and whether you meet repayment deadlines.
Credit Utilization Ratio (30% influence*): It assesses how much of your available credit you use. Maxing out your credit cards may signal potential repayment issues, leading to a lower credit score.
Length of Credit History (15% influence*): The average age of your credit accounts and the time since they were last used are considered here. A longer credit history may improve your credit score. That’s why it is good to start early!
Types of Credit Used (10% influence*): Demonstrating responsible management of various credit types, such as auto loans, mortgages, and credit cards, can positively impact your credit score.
New Credit (10% influence*): Opening multiple credit accounts simultaneously increases the number of inquiries made into your credit history. Lenders may perceive this behavior as financially risky.
What is a good credit?
According to TransUnion Philippines, credit scores range from 300 to 950, with 950 being the highest rating. This means that the higher your score, the better. Anything below 650 is considered a poor or bad credit score.
Why is keeping a good credit score important?
Maintaining a good credit score is crucial because banks and lenders heavily rely on it when deciding whether to approve a loan or credit card application. Your credit report and score provide them with valuable insights into your ability to repay debts responsibly. Demonstrating financial responsibility can earn their trust and increase your chances of loan or credit card approval.
With a good credit score, you get these benefits:
Easier Approval for Credit Cards or Loans: While it doesn’t guarantee approval, a high credit score presents you as a reliable and trustworthy borrower, leading to faster approval of your applications.
Higher Loan Amounts and Lower Interest Rates: A good credit score qualifies you for higher loan amounts or lower loan interest rates, saving you money in the long run.
Lower Insurance Costs: Your credit score can also influence the premiums you pay for insurance. A good credit score may lead to discounts, while a bad score can result in higher premiums.
How do you start building good credit?
Start building your credit by applying for a credit card. As you’ve only just started your credit history, you may not get approved for a traditional credit card. In this case, you may opt for a secured credit card.
A secured credit card requires a cash deposit upfront, which forms the basis for the credit limit that will be issued. This deposit acts as collateral, reducing the risk to the bank that will issue the credit card, and increasing the chances of approval.
With a secured credit card, you can start building your credit history:
- Use your credit card regularly. If you don’t want to spend, you can use it for small recurring payments like your video and music streaming subscriptions.
- Target to keep spending within 30% of your assigned credit limit. As you build your history, your bank will increase your limit.
- Pay in full, and always on time. Set a bill reminder or set it to auto-debit so you never forget!
As you go through your financial journey, a mix of different types of credit such as other credit cards, loans, and mortgages can positively contribute to your credit score and demonstrate your ability to manage different types of credit responsibly.
How do you get your credit score?
Once you’ve started building your credit, you can access your credit score and credit report from one of the three accredited SAEs in the Philippines. Note that there’s a minimal fee for each credit report.
Remember that the sooner you learn good financial habits, the more you can enjoy financial freedom in the future. Click below if you want to learn more about how you can set yourself up for financial success.
You can also click here to learn more about Metrobank credit cards, and click below to read more about how you can manage your credit.
