Credit Score Explained: Your Guide On How It Works and How to Boost Financial Health

In the Philippines, where fintech innovation is driving a surge in credit use in the Philippines, responsible borrowing is a powerful tool that can lead to better economic and social opportunities. However, many Filipinos need to understand another concept of credit aside from due dates, interest and repayment schedules: credit scores.

 

A credit score is a measure of one’s financial trustworthiness which impacts your present and future financial decisions. This number allows financial institutions to evaluate your credit history, repayment behavior and the types of credit one has, allowing them to make a decision based on how low or high your score is. The question now is what happens if my score is low or high?

 

Low credit scores can lead to rejected loan applications or unfavorable  interest rates, making it difficult to secure financing for a car, a house, a multi-purpose or business loan for a small business, or even qualifying for certain jobs. This can also mean the loan amount will be less than what you applied for with shorter repayment periods and higher monthly amortizations than if you had a higher credit score.

 

In contrast, higher scores may lead to larger credit limits, easier loan approvals, and better interest rates, allowing you the freedom to apply for credit that best suits your needs with better terms.

 

To assess your credit score, take a look at your credit report and history. You can request this from accredited credit bureaus in the Philippines, as well as the Credit Information Corporation (CIC) through its Direct-to-Consumer (D2C) through Any Accessing Entity (AE) Program. This enables borrowers to get their credit reports issued by CIC’s authorized partners via email, walk-in to any of their partners’ locations, or through its partners’ mobile app. Note that this calculation only looks at your current credit risk that could still change over time depending on your behavior.

 

How to improve or build your credit score

You can always build your credit score and become financially healthier today, but it requires patience. Essentially, you need a long track record of consistently good financial behavior that can prove to lenders that you’re a responsible borrower. Here are some ways to improve your credit score:

 

1. Pay bills on time

Always make your bill payments before the due date. This is not just about avoiding the late fees and interest charges, but also the best way to prevent a negative impact on your credit score.

 

Also try to keep your Credit Utilization Ratio ratio, or the amount of credit you use versus your total available credit, below 30%. Anything more than this will suggest that you are a high-risk borrower and rely heavily on credit which lowers your credit score. To manage this, make several small payments throughout the month instead of one big chunk, and it will keep your reported balance into a low.

 

2. Limit new credit applications

To maintain a healthy credit profile, only limit your applications to what you absolutely need, as seeking too many loans in just a short timeframe suggests financial instability. Lenders may view you to be taking on more debt than you can handle, signaling financial risk to lenders and raising red flags for credit bureaus.

 

Applying for new credit also reduces the average age of all your credit accounts. A long credit history is a major factor in your credit score, hence, getting new unnecessary credit may bring a negative impact to your record for a certain period of time.

 

3. Consider credit that helps you grow financially

If you have little or no credit history or are trying to repair a damaged one, try getting a low-risk loan. If you repay in full and on time, this will create positive data points for your credit history. 

 

For instance, consider credit that helps you grow like Tala if you have no or limited transactions or lack many documents required to avail traditional financial services. Tala lets you choose your own repayment date, making it easier for users to pay on time. These timely payments are being reported to the CIC and are key to effectively building one’s credit and nurturing one’s financial health.

 

Tala believes in empowering the  financial capacity of the Global Majority and this year, Tala partnered with Empower and Transform’s Salve Ibañez to spread financial literacy and education through online content. According to Salve, one can improve their credit score by repaying on time, borrowing only what you can repay and use credit regularly, but wisely.

 

As a global financial infrastructure company for the Global Majority, Tala delivers accessible and reliable financial services using machine learning technology for fair credit assessments. This allows them to offer the best line of credit without solely relying on traditional credit scores. With just 1 valid ID and an Android  phone, you can get access to flexible repayment options with no collateral, enabling users to achieve better financial health. Visit tala.ph or get the official Tala app to know more.