All About Credit
Credit can make it more convenient for you to manage your finances. But before you take on debt of any kind, you should first understand the basics of credit.
Understand how different types of credit work to use it wisely. In this section, we briefly explain simple terms that are associated with credit like secured and unsecured loans, as well as how credit cards work.
Credit allows consumers to pay for goods and services today and spread the cost over time. It is an especially useful tool during emergencies, when you may need access to cash quickly.
However, taking on credit is a huge responsibility, which is underpinned by your ability and intention to repay. You should only borrow amounts that you can pay back comfortably.
There are several basic types of credit. By understanding how each works, you will be able to get the most out of your money and avoid paying unnecessary charges.
Secured loans are guaranteed by a collateral that is equal in value to or more than the amount of the loan, for example, a property or a car. Thus, examples of secured loans are mortgages and auto loans.
A lender seeks collateral backing for a secured loan in case of the borrower's inability to pay. If a borrower cannot keep up with his loan arrangement and repay his loan, he may be forced to sell his collateral to pay off part, or all, of his debt. In addition, any shortfall will be recovered from him. This may mean that he also has to sell off other assets to repay the debt.
Lenders generally view this as a last resort and will try their best to help the borrower make his repayments, possibly even under a new repayment arrangement.
Nonetheless, it is important for the borrower to be certain from the onset of the loan that he can maintain his loan repayments throughout the loan period.
Unsecured loans do not require collateral and are made based on several criteria including your income, credit history, credit score and ability to repay. An example of such a loan would be a term loan or line of credit.
In an unsecured loan, the lender is providing the loan based on an expectation that the individual will repay the loan - this will usually involve an assessment of the borrower's income and credit history.
Since an unsecured loan does not require collateral, the loan may charge a higher interest rate than a secured loan. This is to compensate the lender for the additional risk it is taking by not asking for collateral.
Using Credit Cards:
Credit cards allow you to spend up to a maximum credit limit, also known as your available credit line.
Cardholders are required to pay a minimum sum each month, usually equivalent to a percentage of the total outstanding balance on the card. Whenever possible, pay your bill in full every month. Otherwise, your balance will be carried forward to the following month and the total sum unpaid will be subject to an interest rate determined by the bank. If you do not pay the minimum sum by the due date, additional late fees will be charged to your account.
When your application for a credit card is approved, the credit card issuer sets a credit limit, which is the maximum balance you can draw from your account. Each credit card issuer has its own parameters for setting credit limits.
Some factors which may affect their decision include:
- Your monthly income
- Current debt (other credit cards, loans)
- Length of residence at your current address
- Home ownership
- Number of times you have applied for credit
- How much credit you need or use
Should you require a larger credit line, you may write to your bank to request for one. Such approvals usually depend on your current financial standing, subject to a regulatory cap.
You may qualify for a higher credit limit if you always pay on time or if your income has increased. Your bank may also grant you a temporary line increase, usually in times of emergency or for a specific one-off use such as to pay for a wedding.
Revolving Lines of Credit:
There are many different types of revolving line of credit products in the market.
Most banks offer an unsecured line of credit, which combines the features of a checking account and personal loan to provide consumers with the flexibility to meet their financial needs.
With most lines of credit, customers can make withdrawals using their cheque books or at ATMs. Interest is charged only on the amount of line utilised.
Some revolving line of credit products are bundled with a term loan, which gives consumers the convenience of repaying their borrowed loan through a fixed monthly instalment. This is typically very useful for consumers as it gives them a structured repayment plan every time they need a loan.
Consumers can increase or reduce the loan tenure with PayLite, giving them greater control and flexibility in managing their cash flow as financial needs evolve.
First-time borrowers are often young adults who are just starting out in their careers.
They tend to have no credit history, which makes it difficult for lenders to assess their financial health and lend to them. However, if people can't borrow, they will not have a chance to build a credit history. So, first-time borrowers often find themselves in a tricky situation.
This situation usually resolves itself when young adults start working because they then have a steady income. This is often viewed positively by lenders when they make lending decisions. A steady income reassures a lender that the borrower can meet his repayments.
A credit history is a record of an individual's past borrowing and repayments, including information about late payments and bankruptcy.
Having a credit history is important for future borrowing requirements, such as taking on a mortgage or an auto loan. The longer and more established a credit history, the better chance the borrower has of obtaining a loan.
In Singapore, payment performance data is provided by the banking and finance industry to CIC. Data relating to your loan payment performance is collated in your credit file and may be used by lenders as part of the assessment process for any new loans you may apply for, or for a review of your existing loans.
Some card issuers have special programmes aimed specifically at first-time borrowers who are trying to build up their credit histories.
It's important that you take a long, hard look at your current and future financial situation before taking on any new credit.
A rule of thumb to determine how much credit you can take on is to compare how much you owe with how much you earn. The amount you owe, or debt, can include monthly payment loans such as auto and home loans, and credit card debt. A simple calculation based on these two parameters is called the debt-to-income ratio.
|Calculating your debt-to-income ratio|
|Monthly debt repayments||VND 4,000,000|
|Monthly take-home pay||VND 10,000,000|
With the above monthly expenses and take-home pay, you would have a debt-to-income of 25%. Because debt-to-income is a ratio that can statistically be applied across all households all over the world, lenders have a huge database from which they can draw inferences about your financial well-being based on this ratio.
The rest of your income is for dealing with daily expenses such as groceries and transport, as well as for your savings. A high debt-to-income ratio could mean that you will be denied further credit or you will have to pay a higher interest rate if you take on more credit.
There are many things you can do to ensure that you get the best deals and stay out of trouble when you take on credit.
- Get a credit product that suits you Ensure that the credit products you get are the ones that best suit your needs.
- Understand the terms of the agreement before you accept a loan or credit card
If you don't understand the terms of agreement related to a loan or credit card, that is a sure sign that you should not take it up. Make sure you understand what is expected of you when you take on credit because once you sign up for it, it's your responsibility to make the repayments.
- Save money each payday for emergencies
It is always prudent to set aside some of your salary as savings. As a general rule of thumb, it is best to set aside at least six months of your monthly salary for emergencies.
- Set a monthly limit for charges and stick to it
Be disciplined about how much you want to charge each month on your credit card. Once you hit the limit that you have set for the month, don't use your credit card again until the following month.
- Shop as carefully with credit as you do with cash
It is sometimes easy to forget that you have to repay your credit card charges when you go on a shopping spree. Be careful and don't overspend with your credit card.
- Don't take on monthly credit payments unless you're certain you can meet them
Be aware of your debt-to-income ratio. Avoid going down the road where your monthly repayments put unwanted strain on your income stream.
- Pay bills promptly and in full
If you don't pay in full, interest charges will start to apply. These interest charges have a tendency to keep growing.
- Give your finances regular "check-ups"
Review your expenditure periodically to see how you can spend and save more wisely. Examine the areas of your life in which you are overspending, and find ways to cut back in those areas.
- Keep credit card information (including the phone number of the issuer) in a safe place in case your cards are lost or stolen
This will enable you to call the relevant people to get your credit card cancelled as a precaution against it being used by someone else.
- Review your loan or card statement when they arrive each month
This is a good habit because you can see what you have spent on and adjust your spending pattern if necessary to ensure you make prompt payment.
Applying for Credit
Applying for credit is a serious business and it will serve you well if you understand the basics of credit.
We show you how you can build a robust credit history from scratch. This will help make potential lenders view you as a reliable borrower.
When you apply for a credit card, personal loan or any other type of credit, the lender must first decide if you are a good credit risk.
Credit scoring is a system used by lenders to determine whether or not you are creditworthy. It is more heavily used when you apply for unsecured credit, including credit cards.
Creditors collect information about you and your credit standing from your credit application and through CIC. The information may include your bill-paying history, the number and types of accounts that you have, late payments, collection actions, whether you have applied for credit recently, outstanding debt and how long you have had existing accounts.
If you already have a lot of debt and are applying for more credit, the creditor may consider you to be over-extended and may deny your application. Your debt-to-income ratio would be the basis for their rejection because they may believe you might not be able to handle additional payments based on your income and existing obligations.
If you have applied with several lenders within a short time, each may have accessed your credit report and their inquiries are recorded in your file. Some lenders may reject an application if the credit report shows an excessive number of inquiries.
Borrowing money can lead to serious problems if your income reduces or you lose your job. So before you borrow, it would be prudent to assess other options.
For instance, if you want to borrow money to pay for a large item, is it possible to save up the money for a few months instead? Is there a possibility that you can increase your income by working overtime or taking on new projects? Or could you take on a higher-paying job with your work experience?
It is important to check if you can afford the repayments before taking out a loan. Remember, if you don't manage to keep up with the repayments for the money you borrow, things can become unmanageable very quickly.
Industry experts note that this can result in three types of difficulties for the borrower.
When you borrow money, and especially if you do not keep up your repayments on your loan, the interest builds up over time. This means that the amount you owe can increase very quickly.
If you do not keep up your repayments, you may receive a negative credit scoring. Even worse, you may have your collateral taken away from you if you have taken a mortgage or an auto loan.
When debt becomes unmanageable, people often experience feelings of fear, stress, guilt, shame or anger. If you are in debt, you may receive phone calls and letters from the companies or people you owe money to.
Follow these simple rules to maintain a solid credit standing.
- Pay your monthly obligations on time.
- Don't overextend yourself. Don't spend or borrow more than what you can repay.
- Notify lenders when you move so that your bills will arrive on time and you can pay on time. Not getting your bill is not a reason for not making payment.
- Be aware of the due dates of your loans or credit card bills, and ensure you pay them promptly.
Gaining Financial Control
The best way to deal with credit problems is to develop good habits before problems start.
Do up a budget so that you are aware of where your hard-earned income is going. If you are overspending in some areas of your life, you should try to spend less in those areas. Such actions ultimately enable you to take control of your financial future.
The key to successful budgeting is deceptively simple - spend less than you earn.
But that is often easier said than done because you can't anticipate some expenses that may crop up unexpectedly. If you actively adhere to a budget however, these sorts of eventualities can potentially be addressed with less stress than would otherwise be the case.
Setting goals with budget planning
- Group financial goals into three time horizons - short-term, mid-term and long-term.
- Ask yourself: What do I need? What do I want?
Your answers to these questions will help define your goals. Once you know what you want, you can begin to budget with a purpose.
Short-term budget goals are those that you typically want to achieve over the next year. These may include paying off your credit card bills fully or saving for a vacation.
Mid-term goals are those you want to achieve over the next two to five years. For example, you may want to save for a downpayment on a new house or renovate your kitchen.
Finally, long-term goals are those that take more than five years to reach. Typically, these have to do with your retirement plans or for your children's future education.
Keeping your budget
- Record the purpose and amounts of your expenditure for one month.
- Account for everything; it may be tedious but doing so will give you a database of information about your spending habits.
- Gather all your receipts and include your credit card bills and loan repayments in this exercise.
As the days go by, you will be able to add up all your tracked expenses and compare it to your income. Remember the key to budgeting is to spend less than you earn. Your analysis will show if you are spending more than you earn and what expenses you may have to cut back on.
Evaluate what you consider as necessities and get rid of the luxury items. For example, instead of going out for lunch, pack food from home, or buy coffee from a hawker centre instead of from the fancy coffee outlets. Sometimes, luxuries can be disguised as necessities, and it's up to you to weed them out to help ease the strain on your budget.
If you are spending less than you earn, you are in good shape. You can use the extra money to pay a greater chunk of your debt, or increase your savings.
As a general rule of thumb, your debt repayments, including those on your credit card, should not exceed 40-50% of your take-home pay. If it does, you could be headed towards that danger zone where it is very difficult to rein in your debt.
If you're unsure that this may be happening to you, here are some warnings signs.
- Regularly spending beyond your budget
- Living from payday to payday
- Being unable to meet large one-off expenses like household insurance
- Always paying only the minimum repayments on your credit card bill each month
- Not knowing how much your total debt is
- Being near, or at, your credit card limit - especially if you have more than one card
- Consistently paying bills late
- Hiding your debt situation from your spouse or partner
If two or more apply to you, it could be time to cut back on your spending and reduce your debt.
Getting your finances under control is not always easy and it can take time. But there are several targets you can set for yourself that will put you in greater control.
Here are some pointers:
Each month, try to reduce a different spending category by 5-10%
For example, take public transport instead of driving on some days.
Start a savings account for large, infrequent expenses
If you spend less than you earn, your surplus can be allocated to expenditure on luxury items.
Charge items to your credit card only if you are sure you can afford to keep up with the monthly repayments
A credit card doesn't make you richer. It facilitates the more convenient use of money that you already have.
Treat a credit card balance like you'd treat a bank loan for the same amount
A credit card balance is essentially an unsecured loan which can get bigger very quickly on the back of interest charges. The best option is to pay your credit card dues fully so that interest charges don't kick in. Even if you decide to have an outstanding amount on your credit card, you must have a plan to repay it.
Avoid the "sale" mentality
When you buy a VND 1,000,000 item on sale for VND 1,200,000 you don't save VND 800,000. You spend VND 200,000. It's only a deal if you need it and can afford it.
Track your spending and income
Monitor how much of your hard-earned money you are spending to make sure you don't sink into debt.
Try to increase your income if you can
Is a second job possible? Can you sell something you no longer need?
Working your way out of debt is a long, hard task. It's also a big accomplishment. Find inexpensive ways to celebrate your progress.
If you feel that your debt is getting out of control, you must tackle the problem immediately.
Sit down and prioritise your responsibilities. For example, meeting essential repayments such as your mortgage and utility bills should be your first concern.
If you are paying off multiple credit card bills, you should pay off those with the highest rate of interest first.
Most lenders are sympathetic to people who cannot afford repayments. Recovering debt can be very expensive to them, so they are often willing to work out an agreement with you.
The best way to handle your worries about debt is to arm yourself with information - not just any information, but credible, reliable, and well-backed information on credit. When you grasp the reality of the situation, it will calm your fears.
Handling Hard Times
Sometimes your debt can become unmanageable because of circumstances that are beyond your control.
We show you how to rein in some of your spending habits so that you regain control of your finances.
When you have recovered from the shock of losing your job, there are a few things you should do as you enter the new phase in your life:
- Sit down with the members of your household and list all expenses. Determine which expenses can be eliminated, reduced or deferred.
- Develop revised budgets covering the next several months based on the new information you develop. Control your spending accordingly.
- Use new credit only for absolute necessities that cannot be delayed, foregone or paid for in any other way. Keep careful account of the credit used.
- Take steps to regain employment, and take advantage of available programmes, benefits and insurance to supplement income.
- Make use of community resources to maintain health, vitality and a positive outlook. Eat well, sleep well and maintain social contacts.
Take steps to help protect yourself from becoming a victim of fraud.
Credit card, Internet, and other types of fraud can often be prevented. While it is not possible to totally prevent fraud from happening, take steps to minimise the risk of it happening to you.
There is no single definition of fraud.
Some types of credit fraud that occur include identity theft, which is the unauthorised use of personal identification information to commit fraud or other crimes, and identity assumption which represents a long-term victimisation of identification information. Credit card users also have to worry about fraud spree, in which unauthorised charges are made on existing accounts.
There are several warning signs that credit fraud may be occurring. You may get bills arriving from unknown or unfamiliar sources, or receive calls from creditors or collection agencies about making payments that you know nothing about.
It is not possible to totally prevent fraud from happening, but there are measures that you can take to protect yourself.
- Sign on the back of your credit card the moment you receive it
- Keep an eye on your card as far as possible when making transactions
- Dispose of all personal documents properly
- Check your account balances regularly
- Review your monthly statements and report discrepancies immediately
- Inform your bank in advance of any address change
- Patronise only reputable websites when making purchases
- Beware of unsolicited e-mails asking for personal information
- Never lend your credit card to anyone
- Get the free Citi Alerts service to protect yourself
Credit card fraud on the Internet is growing and can catch anyone by surprise. To avoid becoming the victim of Internet fraud, do not give your credit card number online unless the site requiring your card details is a secure and reputable site.
You should never trust a site just because it claims to be secure. You should do your homework on the company to ensure that it is legitimate. Try to obtain a physical address rather than merely a post office box and a phone number.
For further reassurance, call the seller to see if the number is correct and valid. Send them an e-mail to see if they have an active e-mail address and be wary of sellers who use free web-based e-mail accounts.
Be cautious when responding to special offers, especially through unsolicited e-mail. If a deal is too good to be true, it probably is. Don't be conned by such scams
It is important to inform your bank immediately once you discover your card is not in your possession.
If your wallet was stolen or lost, you will need to report the loss of the wallet to the police, and the loss of your card to the card issuer.
Fraud prevention is a shared responsibility involving banks, customers and merchants.
Keep your card safe
- Choose a personal identification number (PIN) that's not your phone number, home address or your birthday.
- Memorise your PIN and don't write it on anything in your wallet. According to banking industry data, in a third of all ATM card frauds, the PIN was on the card or in the wallet. Destroy the PIN mailer that you receive after memorising this PIN.
- Check all your receipts against bank statements. You will be able to spot any unauthorised transactions.
- You should not lend your cards to anyone or leave cards and receipts lying around in your home or on your office desk.
- Use alert services provided by banks, for example Citi Alerts, to keep track of unauthorised use of your card.
There are several services in the market that you can get to protect against fraud. Here are some examples of security features that Citibank offers.
Protection From Unauthorised Use Of Your Card
- Be alerted via SMS each time your credit card is used.
- Customise this alert for transactions above an amount of your choice.
Citi Alerts also allows you to check your credit card account details like outstanding bill, payment due date, available credit line and last four transactional details.
Fraud Early Warning
Citibank's control system monitors your credit card transactions, and triggers alerts should there be any suspicious activity on your card, and you will be contacted immediately to verify your recent usage.
Identity theft happens when someone accesses essential elements of the information that identifies you in order to commit fraud and theft.
All fraudsters need is your personal information to commit identity theft. Identity thieves can use this personal information to open credit card accounts, obtain loans and even mortgages in your name.
While it is not possible to protect yourself from all types of identity theft, there are some steps you can take:
- Protect your letterbox
Your letterbox is a favourite target of identity thieves, so it is important to always remove your mail as soon after delivery as possible. Also, it is best not to dispose of mail containing your personal details in public bins.
- Protect your wallet
Identity thieves also try to get access to people's wallets. Minimise your risk by keeping items with personal information in a safe place at home. Identity thieves look for information on old receipts. Don't leave receipts at ATMs or bank counters. It is a good idea to destroy all of your receipts when you no longer need them.
- Protect your credit and debit cards
There are some very important precautions to take with your credit card. Whenever you receive a new credit card, sign on it immediately. Never loan your credit card to anyone. Notify your bank and other issuers when you change your address or phone number and be sure to report all lost or stolen cards immediately.
There are various ways a person can fall prey to a fraudster:
- Mail redirection
Once fraudsters have documents with personal information of the victim, they can change the victim's address and redirect mail to themselves.
This is where e-mails are created to look like they have come from a legitimate source, such as your bank. These mails will ask for account details or ask the account holder to update his/her personal details. Sometimes, they may even ask the victim to disclose his/her PIN.
- Cold Calling
Some fraudsters call customers, offering non-existent products or services. During the call, they will ask the customer to confirm security information that they later use.
If you are the victim of identity theft, it is vital that you act quickly to minimise the damage to your name and your financial reputation.
In Singapore, the first thing you should do is file a police report. Even if the police can't catch the identity thief, having a copy of the police report can help you when dealing with creditors. Get a copy of the police report in case the bank, credit card company or others need proof of the crime.
When dealing with the authorities, creditors and financial institutions keep a log of names, dates, times, correspondence addresses and telephone numbers; include a synopsis of all conversations.
Follow up all conversations in writing, recapping the conversation and any conclusions that were reached. Keep and file all correspondence. Send all correspondence by certified mail, return receipt requested. Print out and file all email. Keep a record of the amount of time you spend working on the matter: You may later be able to seek restitution.
Reclaiming your identity can be a tedious and frustrating process.
The following steps can help you regain control of your identity:
- Credit cards, debit cards, or other bank accounts
If you have reason to believe that an identity thief has tampered with your accounts, close them immediately and open new ones.
If you believe that an identity thief has tampered with your securities, investments or brokerage account, immediately report it to your broker or account manager.
- Phone service
If an identity thief has established a new phone service in your name, is making unauthorised calls that seem to come from your cell phone, or is using your calling card and PIN, contact your service provider immediately to cancel the account and/or calling card. Open new accounts and choose new PINs.