What Your Credit Score Means


It's easy to know when people are discussing personal finances. Just listen for the terms "credit score", “credit history”, or "credit reports", and you'll know what subject they're talking about.

Those who are new to personal finances may often confuse these terms, but really, they’re just terms that indicate whether a person can reliably pay his or her debt. They are all important, because they show the entire picture of a person's financial history, which in turn will determine how much money the banks or other lending institutions will lend them and how high or low their interest rates will be.

If you are looking to buy a car in the Philippines and would like to apply for a car loan, knowing these terms is invaluable when entering the car financing step.

## Credit Score, Credit History and Credit report

Before we discuss what a credit score is, we’ll first discuss credit history and credit report, since a credit score couldn’t exist without it.

### Credit History

A credit history is a record of a person's financial profile. It may include a person's credit usage over the years, his loan payment schedule, and other personal information such as types of credit used, debt history, promptness in paying bills, educational background, bankruptcy claims, court judgments, and other public information.

Take note that a person's credit history doesn't have to be based on credit cards alone. Even if you don't have credit cards, SSS payments, or even a bank account, you can still build your credit history just by your utility bills and mobile phone payments alone.

A credit history can be requested from banks and collection agents for free if you decide to apply for car financing. Often, the ones who request it are banks, credit unions, auto financing companies, insurance companies, credit card issuers, and other lending institutions. That way, they’ll get to see how 'creditworthy' a person is (or how eligible they are from getting a loan).

### Credit Reports

Credit reports are simply a compilation of a person's entire credit history. Traditionally, most banks used internal or external database of other companies or institutions to look for a person’s credit report, such as the following:

- Bankers Association of the Philippines
- Credit Bureau
- Credit Card Association of the Philippines
- C4 (Consolidated Canceled Credit Cards)
- Negative Files
- TransUnion (partnered with MetroBank and HSBC)

Today, they are compiled by one agency--The Credit Information Corporation, or CIC. The CIC was created under the virtue of Republic Act. No. 9510, otherwise known as the Credit Information System Act (CISA).

It is a government-owned and controlled company, and was created to "collect, collate, and disseminate credit information" from "banks, financial institutions, insurance companies, financing companies, credit cooperatives, as well as utility companies and other businesses that extend loans".

It started its operation in June 2015, although the national credit history database that the CIC is currently compiling isn't finished yet. CIC expects to complete their entire database by June 15, 2017.

### Credit Score

What does your credit score mean? It’s just a just a numerical value given to your entire credit report. There are many factors used to calculate your credit score when looking to apply for a car loan in the Philippines, and they can include your:

- Payment History
- The amount of credit they still owe
- Length of credit history
- Kinds of credit used (such as credit card, car loans, mortgages, and etc.)
- New credit (this score changes the more you apply and get new credit loans)

Let's look at it this way: a credit report is like a student's report card, while a credit score is the Grade Point Average of the student.

### How to Know What Your Credit Score Means

The Credit Management Association of The Philippines, or simply CMAP, uses a credit score ranking when assessing your person's eligibility. Here’s what your credit score number means:

- Excellent Credit – 750-850
- Good Credit – 660-749
- Fair Credit – 620-659
- Bad/Poor Credit – 350-619
- No Credit – 0-0

## Importance of Credit Scores

### Low (Bad/Poor) Credit Score

It's now easy to see why credit scores are so important. A low credit score indicates a person’s inability to pay off his debts. Missing payments, bankruptcy charges, accumulated debts, and cancelled credit cards lower a person's credit score, and the lower your rating is, the more you become a "risky borrower" or "less creditworthy".

It indicates to the bank or loaning company that you might not be reliable, and that you won't be able to pay off your loans. When this happens, then you can expect the following consequences:

- Difficulty getting loans / credit cards from banks and other loan institutions
- Unable to enjoy interest rate discounts or other perks when getting a loan
- Negatively affect your chances of getting employed in a company

It's not easy to wipe the slate clean once you get a low credit score. Think of it this way: would you trust a person who hasn't paid his or her debt to you for a long time? And once they did pay it, will you immediately lend money to them when they borrow from you again? Or you'd think twice before saying yes?

It's the same with banks and other lending institutions. It takes a long time to regain their trust, and even when they do, they'll be extremely cautious when it comes to lending you large sums of money.

Many people who have paid all their loans would ask us how long it would take to clear and eventually improve their low credit ratings. It would actually take a long time--around 3 to 6 years, so think about that before you decide to skip your monthly payment.

### Good Credit Score

On the other hand, a good credit score allows you to enjoy the following:
- Lower interest rates on loans
- Easier credit access
- Better chances of getting hired by employers and even banks (because it shows you're responsible and trustworthy)

### How To Maintain a Good Credit Score

A good credit score means you would have a "Positive Credit Information" in your credit history. Here’s a list of a positive credit score check:
Don't let your debts accumulate.

- Don't extend credit close to its limit.
- Reduce credit card applications.
- Check out your credit report regularly. [Here's>(http://www.cibi.com.ph/?q=solutions/products-and-services/people-information/people-information) a helpful site.
- Manage your spending (avoid overspending).
- Don’t live beyond your means.
- Attempt to pay your monthly credit card balance in full, or at least just pay the minimum amount before the due date.
- Pay your bills on time.
- Work with your creditors in figuring out a payment plan that's realistic for you.
- Inform creditors of changes, especially change of address so you will still receive your bills every month.
- Have a consistent work history.

Your credit card score, including your credit history and credit report, are significant factors that will determine your ability to acquire a car loan/financing or a credit card. By maintaining a positive score, you’ll experience far better choices and opportunities that will benefit you for a long time, such as buying a car.

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