How Credit Cards Affect Your Credit Score and TDSR

From time to time there’d be questions in the Telegram chat group about how credit cards affect one’s credit score, so perhaps it’d be useful to address this issue based on my experience.

What is a credit report?

A credit report in Singapore is issued by Credit Bureau Singapore, and it contains a score based on your credit history. You are given a risk grade between the best possible grade of AA to the worst of HH. There is also a score between 1,000 to 2,000 with 2,000 being the best possible score.

The score or grade reflects the probability of default as assessed by your available credit data, and it changes from time to time. This report allows financial institutions like banks to decide whether to loan you money.

Get a free credit report

You can go to creditbureau.com.sg to purchase a credit report, or you can redeem a free one whenever you apply for a credit product. This includes credit cards, so if you want a free report, simply sign up for a credit card, and you can get a free report (after the bank makes an enquiry with Credit Bureau).

Credit cards’ impact on credit score

Not having any credit cards or loans may seem like it should give you a favourable credit score; “you’re debt free!” you may think, but not having a credit history is actually bad for your credit score. Financial institutions prefer to see a history of timely loan repayments, and not having any debt history actually impacts your score negatively.

As such, an easy and low commitment way of having a credit history is to use a credit card and make timely repayments. This builds up your credit score as it displays an ability and willingness to repay your debts.

Having many credit cards, or applying for multiple credit cards, on the other hand, impacts one’s credit score adversely. However, this impact is minimal – according to your report, such activities increase one’s risk of default “marginally”, but credit score recovers after a while of timely debt repayments. I have about 30 active credit cards (I think), and my risk grade is AA because I pay my credit card bills in a timely manner because I am a person with outstanding moral fibre. Also there are $80 to $100 of late charges.

Cancelling all your cards with a bank results in a drop in available credit limit, and this too affects your credit report a little. But again, it doesn’t seem to do anything devastating and my score goes back to AA after a while.

Not paying your credit card bills on time is predictably devastating for your credit score, not to mention the exorbitant late charges and interest rates you have to pay. It goes without saying that you should avoid this scenario.

Is credit report all that important anyway?

My experience is that credit report isn’t all that important in Singapore’s context. Unless you have a really bad score, it doesn’t seem to matter much if your grade is AA or CC. There are people who complain about being rejected for credit cards with an AA rating, and I believe I got my mortgage at a CC rating with no additional interest.

It is quite unlike credit score in US which seems to be quite encompassing and affects one’s financial life a lot.

As it is, you shouldn’t worry too much about your credit score as long as you are doing the prudent thing of not defaulting on your loans.

Credit cards’ impact on TDSR

Credit cards do make a noticeable dent on your ability to borrow when TDSR (Total Debt Servicing Ratio) is in the picture, usually when you want to borrow for a car loan or property purchase. Each card’s minimum payment amount forms part of your TDSR limit, and depending on how tight your TDSR is and how many cards you use, this could be an issue.

When I was applying for a mortgage loan, I discovered this interesting (and annoying) fact about credit cards’ interaction with TDSR. Because I regularly use multiple cards to maximise my rewards, each card’s minimum payment amount ate into my TDSR.

Spending $1,000 on a single card results in a minimum payment of $50, and that means your available TDSR would be reduced by $50. Spending $1,000 across say 10 cards, however, results in a minimum payment amount of $50 x 10 = $500, and that resulted in a diminished ability to borrow when I was applying for a mortgage loan.

This was a temporary hiccup, and I had to restrain my optimising habits for a couple of months and limit my spend to just one or two cards so that I could free up my TDSR for mortgage application. Once the mortgage was issued, I could then go back to my merry ways of chasing cashback and miles without encumbrance.

Conclusion

The long and short of it is this: you don’t need to worry too much about credit score even if you are applying for multiple cards as long as you pay your credit card bills on time.

When it’s time for a sizeable loan like mortgage, do reduce the number of cards so that you won’t get multiple minimum payment amounts clogging up your TDSR.

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