If you still don’t have a credit history, one thing you can do is take out a loan from a money lender Singapore to build it. Make the monthly payments consistently, and you’ll be on your way to a good credit history and credit score.
But this is not the only way to build your credit history. There are pros and cons to using a loan for this purpose. Let’s take a look at both sides.
First off, here are three advantages of using a loan to build your credit history.
It establishes your credit profile
Suppose you’re a new graduate on your first job. You still don’t have a credit history, so you decide to take out a small loan. How you pay down this loan will start off your credit profile.
If you repay your loan on time, that’s good news for your credit profile. It tells the CBS (Credit Bureau Singapore) that you can be trusted to pay back the money you borrowed.
It shows that you can handle paying off debts
If you always make your monthly repayments on time and in full, the CBS and lending institutions will know that you are capable of repaying your loans. That means they will have more trust in you when you apply for another loan in the future.
What this means is qualifying for loans in the future will be easier for you. Lenders may even give you lower interest rates and more comfortable repayment terms. That makes it easier to both apply for and pay back your future loans.
Paying off the loan on time vastly improves your credit score
Paying off your loan on time has another clear advantage – your credit score will soar. The better your credit score, the easier it will be to qualify for credit cards and apply for larger loans. These include property loans, business loans, and automotive loans to fund more costly purchases.
When your credit score is high early on in your career, you set yourself up for financial success. Just make sure to pay off your loans, credit cards, and other bills consistently on time and in full.
Despite these benefits, there are also some risks to watch out for. Here are three disadvantages of taking out a loan to build your credit history.
Interest payments
If you take out a loan, you will always have to pay interest. No loan is without interest. This will be an additional monthly expense until you fully repay the loan, so make sure you have the budget for it.
Fees and charges
Aside from interest, some lenders may charge you additional fees for the duration of the loan’s tenure. Likewise, you need to have the means to pay for these extra fees. If not, you will strain your budget and it may lead to unexpected financial trouble.
Inherent financial risk
Like it or not, emergencies that would drain your finances can happen. If this happens while you are paying your loan, you may end up missing payments or making only partial payments for some months. In turn, you will take longer to fully repay your loan, and you will have to pay more in interest.
Missed and late repayments can also negatively affect your credit score. It may go down as a result, which defeats your purpose of taking out the loan in the first place. You want to build a good credit history and increase your credit score, not decrease it.
Even worse, you may face financial difficulty when your budget runs dry and you still have a loan to pay off. It’s not a good situation to be in, especially if you did not really need the loan in the first place.
Thankfully, there are alternatives. Consider these as well before deciding to take out a loan.
Credit card
In Singapore, using a credit card is enough to build a decent credit history. Just make sure to pay your credit card bills on time and in full consistently. Avoid paying only the minimum amount, as you will be slapped with interest payments. It’s also not good for your credit score.
Secured credit card
If you don’t qualify for a regular credit card, you can get a secured credit card. Here, you have to make a deposit of a certain amount of money, which will also define your credit limit. Using your secured credit card for purchases will build your credit history.
Conclusion
Taking out a loan to build your credit history does work, but it’s not the best way. It may have its advantages, but it’s good to be aware of its risks as well. At the end of the day, what matters is not how your credit history began, but how you maintain your credit score in the long run.
