Have you ever been frustrated by a loan rejection due to your poor credit score? In the Philippines, a bad credit score can feel like an insurmountable obstacle, especially when trying to secure loans or credit facilities. Moreover, with the lack of a unified credit reporting system, understanding how your score is assessed can be quite confusing as well.
Therefore, to make the entire process of understanding and improving your credit score in the Philippines much simpler, in this blog, we will break down the complexities of credit scores in the Philippines, highlight the factors that can hurt your score, and provide practical steps to help you improve it. It is fair to say that by the end of this article, you'll have all the tools you need to take control of your financial future and build a stronger credit profile. So, without much ado, let's get started.
Understanding Credit Scores in the Philippines
A credit score represents a crucial indicator of creditworthiness, often as a three-digit number that provides a snapshot of an individual's ability to manage borrowed money. In the Philippines, the landscape surrounding credit scores continues to evolve, with no single unified credit reporting system in place. Instead, various financial institutions rely on distinct scoring models to assess creditworthiness.
A notable entity within this landscape is the Credit Information Corporation (CIC), which serves as the central hub for credit reporting in the country. Established under the Credit Information System Act (Republic Act 9510), these sources, referred to as 'submitting entities,' include banks, quasi-banks, cooperatives, microfinancing organizations, credit card companies, and government lending institutions.
In addition to conventional credit history, the credit scoring considerations in the Philippines are gradually expanding. Alternative data, such as utility payments and telco bills, which could provide supplementary insights about an individual's financial behavior, are gaining recognition in the credit assessment process.
Supporting the evolving credit framework is the Credit Management Association of the Philippines (CMAP), a formidable organization with nearly 400 members representing diverse sectors, including banking, finance, and services. CMAP works in tandem with CIC, significantly influencing credit management practices across the nation. The organization's influence was exemplified at its 41st National Credit Congress and 91st Founding Anniversary in April 2023, underscoring its long-standing commitment to enhancing the credit landscape.
Bad Credit Scores in The Philippines - A Brief Overview
A bad credit score in the Philippines refers to a low rating given by credit bureaus, indicating a borrower’s poor creditworthiness. This score is calculated based on an individual’s financial history, including repayment patterns, outstanding debts, and the frequency of late payments. A bad score can make it difficult to access loans, credit cards, and favorable financial products.
Classification of Credit Scores and Their Meanings
- 300 - 579 (Poor) - A score in this range is considered poor, indicating a history of late payments or default. Borrowers with this score may have difficulty getting loans or credit cards, or they may face high interest rates.
- 580 - 669 (Fair) - This range indicates fair credit, meaning the borrower has occasional late payments or existing debts. While some lenders may still approve loans, they may impose higher interest rates due to the perceived risk.
- 670 - 739 (Good) - A good credit score demonstrates responsible borrowing habits, with regular repayments and low outstanding debts. Borrowers with scores in this range are likely to receive favorable loan terms and lower interest rates.
- 740 - 799 (Very Good) - A very good score indicates a strong credit history with consistent repayment and low debt levels. Lenders will typically offer the best interest rates and terms to borrowers in this category.
- 800 - 900 (Excellent) - An excellent score shows that the borrower has an outstanding credit history. Individuals with scores in this range are likely to receive the lowest interest rates and the best loan terms available.
Common Factors Leading to Bad Credit Scores
In this section, we'll explore the most common reasons behind poor credit scores in the Philippines, helping you pinpoint areas where you may need to take action to boost your creditworthiness.
1. Late or missed payments negatively impact scores.
In the Philippines, payment history is a major player, constituting about 35% of your credit score. This means that even a single late or missed payment could have significant repercussions since they adversely affect your scores and might appear on your credit report after at least 30 days. Hence, consistently paying your dues on time is fundamental to financial health.
2. High credit utilization ratios increase risk.
Another significant factor is the credit utilization ratio, which influences 30% of your credit score. This ratio reflects the proportion of your credit limit that you're using. A higher ratio might suggest financial instability as it appears you're excessively dependent on credit. Therefore, maintaining a utilization ratio below 30% is advisable, signaling responsible management of credit.
3. Accumulating significant amounts of debt.
On accumulating significant debt, the correlation between debt levels and credit health in the Philippines is quite evident. Large amounts of debt not only hike up your credit utilization ratio but also indicate financial distress to lenders, thereby negatively affecting your score. Hence, living within your means and avoiding excessive debt accrual is of vital importance.
4. Filing for bankruptcy can have substantial consequences.
Filing for bankruptcy, while specifics about its impact in the Philippines are limited, is globally notorious for severely affecting credit scores for an extended period. It's widely viewed as a significant negative event in credit scoring.
This is the case primarily because it remains on your credit report for up to 7 years, indicating financial distress and making it harder to secure loans or credit for that duration. During this period, lenders may view you as a high-risk borrower, resulting in higher interest rates or outright denial of credit applications.
5. Errors on credit reports can misrepresent financial health.
Errors in your credit report can also tarnish your financial standing. Mistakes such as incorrect personal information or erroneous listings can misrepresent your creditworthiness. It's important to regularly inspect your credit reports for accuracy and dispute any discrepancies through the Credit Information Corporation (CIC) in the Philippines.
A helpful resource on this process is available in a YouTube video here: Correct Errors on Your Credit Record.
Also Read: Calculating Cash Flow From Financing Activities: Definition and Method
How to Evaluate Your Credit Score
Evaluating your credit score in the Philippines is an essential step toward understanding your financial health and making informed decisions. While the process can seem complex, there are several straightforward ways to check your credit score. Here's how to evaluate your credit score in the Philippines and take proactive steps to improve it:
1. Check Your Credit Report from Credit Bureaus
To evaluate your credit score in the Philippines, the first step is to obtain your credit report from a credit bureau. The most prominent credit bureaus in the country include the Credit Information Corporation (CIC), which is government-mandated. By law, you are entitled to a free credit report once a year, which will provide you with your score and a breakdown of your credit history.
2. Understand the Credit Scoring System
In the Philippines, credit scores generally range from 300 to 850, with higher scores indicating better creditworthiness. A score of 700 or above is typically considered good, while scores below 600 are seen as poor and may result in loan rejections. Understanding this scale helps you interpret your credit report and assess how lenders might view you. By familiarizing yourself with the ranges, you can identify where your score stands and understand the specific areas that need attention to improve your financial standing.
3. Review the Factors Affecting Your Score
Several factors, including your payment history, outstanding debts, credit utilization rate, and the length of your credit history, influence your credit score. Reviewing your credit report will show you how each of these aspects impacts your score. For example, missed payments or high levels of debt can lower your score, while maintaining a low credit utilization rate and making timely payments can improve it.
4. Use Online Credit Score Checking Tools
In addition to obtaining a credit report from credit bureaus, you can also use online platforms or apps to check your credit score regularly. Some financial institutions and fintech companies in the Philippines offer free or paid services that allow you to monitor your credit score in real time. These tools often provide insights and recommendations on how to improve your score based on your financial behavior, making it easier to track your progress and stay on top of your credit health.
Also Read: How to Calculate Net Cash Flow in The Philippines: Definition, Formula, and Examples
How To Improve a Bad Credit Score - Essential Steps to Follow
Maintaining a good credit score in the Philippines starts with the foundational habit of paying bills on time. This not only builds credit but also prevents the accumulation of late fees that can detrimentally impact your overall credit profile. Here's a closer look at the steps you can take to improve your credit score in the Philippines:
1. Credit Utilization Ratio
A crucial criterion lenders assess is the credit utilization ratio. This ratio should ideally stay below 30% of your total credit limit. For instance, if your credit ceiling is PHP 100k, strive to limit your spending to under PHP 30k. Keeping a low utilization ratio signals to lenders your adeptness at managing credit.
One effective approach is to pay off your credit card balances in full each month or make multiple payments throughout the month to maintain low balances. Distributing expenses across different credit cards can also prevent any single account from becoming overly utilized.
2. Increasing Credit Limit
Requesting a credit limit increase is another savvy strategy, but exercise caution. If your bank has a reputation for conducting hard inquiries during limit requests, which can initially drop your score, you might want to choose banks more inclined toward soft inquiries. Timing this request after demonstrating credit responsibility, supported by evidence of increased income or financial improvement, can maximize the positive impact on your credit score.
3. New Credit Applications
Minimizing the frequency of new credit applications is equally essential. Each application results in a hard inquiry, potentially lowering your score. To eliminate this, spread out your applications and utilize pre-qualification tools that do not affect your score. Restrict your applications to essentials and ideally limit them to once every 6 months.
4. Addressing Negative Marks
Lastly, addressing any lingering negative marks, like outstanding collections or charge-offs, can gradually improve your score. Engage creditors to negotiate payment plans or settlements, and consider requesting a 'pay for delete' agreement. Documenting all agreements can help rectify discrepancies in your credit report and accurately reflect your efforts to resolve outstanding debts.
For more insights, you can take a look at this detailed Reddit thread where users highlight some of their personal experiences with bad credit scores and how they went about improving them in the Philippines.
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Important Credit Score Management Strategies To Implement
Maintaining a good credit score over the long term requires consistent effort and smart financial habits. In the Philippines, building and maintaining a strong credit profile can open doors to better loan options and financial stability. Here are some effective strategies to implement to manage your credit score for long-term success:
1. Pay Bills on Time
One of the most crucial factors affecting your credit score is your payment history. Making timely payments for bills, loans, and credit cards is essential to avoid negative marks on your credit report. Late or missed payments can significantly impact your score and may stay on your record for years. By setting up reminders or automating payments, you can ensure that your payments are always on time, improving your creditworthiness over time.
2. Maintain Low Credit Utilization
Credit utilization refers to the ratio of your current credit card balances to your available credit limits. Keeping this ratio below 30% is a key strategy for maintaining a healthy credit score. High credit utilization signals to lenders that you might be overly reliant on credit, which could make you appear risky. By paying off your credit card balances regularly and avoiding maxing out your cards, you can demonstrate responsible credit usage and improve your score.
3. Diversify Your Credit Portfolio
Having a variety of credit types, such as credit cards, personal loans, and auto loans, can positively influence your credit score. Credit mix accounts for a portion of your credit score calculation, so maintaining a balanced portfolio of credit types, with responsible management, can improve your score. However, it's important to only open credit accounts as needed and avoid taking on unnecessary debt that could strain your financial health.
4. Monitor Your Credit Report Regularly
Regularly checking your credit report allows you to spot any errors or fraudulent activities that may be damaging your score. In the Philippines, you can request your credit report from major credit bureaus like the Credit Information Corporation (CIC). By reviewing your report, you can ensure all the information is accurate and dispute any discrepancies, which could otherwise lower your score. Keeping track of your credit report also helps you stay aware of your progress toward maintaining a healthy score.
5. Limit Credit Applications
Each time you apply for credit, a hard inquiry is made on your credit report, which can slightly lower your overall credit score. While occasional credit applications are normal, making frequent applications can signal to lenders that you may be in financial distress, potentially lowering your credit score over time. Instead of applying for credit repeatedly, focus on maintaining responsible credit usage and only apply when necessary.
Also Read: Types of Business Loans Available For Construction Companies in The Philippines
Benefits of Possessing a Good Credit Score
A good credit score in the Philippines opens the door to numerous financial benefits, making it easier to access loans, credit cards, and favorable interest rates. Having a strong credit score not only enhances your financial opportunities but also provides long-term security and savings.
Below are 10 key benefits of maintaining a good credit score:
1. Easier Loan Approval
A good credit score increases your chances of being approved for loans, whether personal, auto, or home. Lenders are more likely to view you as a trustworthy borrower with the ability to repay debt, which simplifies the loan approval process. This can save you time and effort when applying for financial products.
2. Lower Interest Rates
With a high credit score, you'll typically qualify for lower interest rates on loans and credit cards. Lenders offer better terms to customers with a good credit history because they view them as lower-risk borrowers. Lower interest rates can save you a substantial amount of money over time, especially on large loans like mortgages.
3. Access to Larger Loan Amounts
A strong credit score often makes it easier to access larger loan amounts. Lenders are more inclined to approve higher loan amounts for borrowers with good credit, knowing they are more likely to manage repayment successfully. This can be highly beneficial when making significant purchases like a home or a car.
4. Higher Credit Limits
With a good credit score, banks and financial institutions are more likely to offer you higher credit limits on credit cards and lines of credit. This gives you greater flexibility in managing your finances, whether for emergencies, investments, or making large purchases without maxing out your credit.
5. Better Terms for Credit Cards
A high credit score helps you secure credit cards with better terms, such as rewards, cashback offers, and lower fees. Card issuers are more likely to offer attractive perks to individuals with good credit, allowing you to maximize the benefits of your credit card usage.
6. Faster Approval for Rent Applications
Landlords and property managers often check credit scores as part of the rental application process. A good credit score increases your chances of being approved for a rental property as it signals that you are a reliable tenant and can be especially helpful when engaging in competitive rental markets.
7. Lower Insurance Premiums
In the Philippines, some insurance companies use your credit score to determine your premiums. A good credit score can lower your car, home, or health insurance premiums, as insurers perceive you as less of a financial risk, which could potentially result in substantial savings over time.
8. Increased Negotiation Power
A good credit score gives you more bargaining power when negotiating financial terms with lenders, credit card companies, or even service providers. You may be able to negotiate better terms for loans, lower interest rates, and even reduced fees, ultimately saving you money.
9. Access to Business Financing
For entrepreneurs, having a good credit score is essential when seeking business loans or financing. Lenders view good credit scores as an indication of responsible financial management, making it easier to secure funding for a new business or expansion efforts.
10. Improved Financial Stability
Maintaining a good credit score can lead to greater financial stability and peace of mind. It allows you to access emergency funds, avoid financial stress, and plan for the future more effectively. A strong credit score essentially reflects your overall financial health and provides the foundation for future growth opportunities.
Conclusion
In conclusion, checking and improving your credit score in the Philippines is a crucial step toward financial stability and access to better opportunities. By understanding the factors that affect your score, regularly monitoring your credit report, and taking effective measures such as paying bills on time, managing debt, and maintaining a low credit utilization ratio, you can gradually enhance your creditworthiness.
Out of the effective measures mentioned above, maintaining a low credit utilization ratio is especially crucial for a healthy credit score. This ratio is the percentage of your available credit that you're using at any given time. A high ratio signals to lenders that you may be over-relying on credit, which can indicate financial instability. Ideally, you should aim to keep your credit utilization below 30% of your total available credit to demonstrate to lenders that you are responsible with your borrowing and can manage debt effectively.
Having a good credit score can also unlock significant opportunities for aspiring Filipino entrepreneurs. With a solid credit history, entrepreneurs can increase their chances of securing financing from NBFIs like N90, which offer dedicated SME loans. These loans can help entrepreneurs invest in their businesses, purchase equipment, and cover operational costs. Get in touch with N90 today to give your budding Philippine SME the funding it deserves.
Frequently Asked Questions (FAQs)
1. How can I clear my bad credit history in the Philippines?
To clear your bad credit history in the Philippines, start by checking your credit report for inaccuracies and disputing any errors. Pay off outstanding debts and ensure timely bill payments moving forward. Avoid accumulating new debt and reduce credit card balances. Over time, consistent positive financial behavior will improve your credit score and clear negative marks.
2. How to check if you are blocked for credit in the Philippines?
To check if you're blocked for credit in the Philippines, request a copy of your credit report from the Credit Information Corporation (CIC) or any accredited credit bureau. These reports will indicate if you have any negative marks, including being blocked. Alternatively, you can check with lenders or financial institutions to see if they have flagged you.
3. How long does bad credit stay on record in the Philippines?
In the Philippines, bad credit typically stays on record for up to 3 to 5 years. Negative marks, such as missed payments or defaults, are recorded in your credit history and gradually lose impact over time as you demonstrate responsible financial behavior. After the period, the records may be removed, improving your chances of securing future credit.
4. What happens to unpaid credit card debt after 7 years in the Philippines?
In the Philippines, unpaid credit card debt may remain on your credit report for up to 7 years. After this period, the debt is generally considered "charged off" or written off by the creditor. However, the debt may still be collected if it's not settled, and it can continue to affect your credit score and ability to secure future credit.
