Are You (Sub) Prime?

What can be worse than having no money in your pocket? Having no credit in your favor.

Well, I do not mean that piece of plastic, but rather something intangible and more powerful. It is one’s credit worthiness. To ask it simply,

“Are you credit-worthy or are you credit-risky?”

As the wikipedia definition of credit history goes: Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score.

In the recent nine months or so, with headlines of sub prime news sprawling across newspapers and primetime news, if you are still not a bit aware of the seriousness of matters, hello! It is time to wake up and smell the coffee.

Basically, the sub prime losses stem from an insatiable appetite for credit and the stupid assumption that “prices will always go up and never come down”. Throw in some flowery description like “Collateralized Debt Obligations (CDO)” and “Asset-Backed Securities” and we get this whole sub prime mess. While it appears that most negative news has surfaced, it is not over til it is finally over. And with mountains of bad debts being written off, I wonder how many Americans’ credit scores will suffer.

Here I would like to relate an incident that makes me realize how important one’s credit history is to his life and family. I have this friend, who is also a client of mine. Lets’ call him Mr.B. Recently, because of the relatively low bank mortgage rates, he decided to refinance his mortgage to save some money on the monthly installments and at the same time include his wife to be the co-payer of the mortgage, since she has just started working on a full-time basis. The money saved can then be channeled towards getting insurance protection for their family and setting up education funding for their children.

We began sending applications to a couple of banks and were rejected on various grounds, no CPF contribution (reason: my client is a full-commission sales agent), and no regular CPF contribution for the wife. One of the biggest roadblocks we faced was the unveiling of a previous court case that was classified as “outstanding”. According to Mr. B, the case was a result of a botched business dealing, and he actually FORGOT to make an effort to close the case. Just when we thought we crossed the biggest hurdle, another check with the credit bureau uncovered yet another dramatic happening. Mr. B’s NRIC number had actually been used to be guarantor for a loan he did not know of. Mr. B had to verify the case with the law firm and file a complaint to withdraw the alleged accusation made against him. Though it was deemed to be settled, by the time we went back on track, the banks have closed their doors to new applications on that “so-damned-good” rates. What a pity, I thought.

Since Apr2008, Mr. B has yet to find one bank that is willing to accept him as a client. This is a lesson well learnt for Mr. B as well as for me personally. We are still trying now. In this context, Mr. B would have been deemed a “sub prime” case to the banks.

On the other, I have Mr. A, who is the typical “prime” case. Mr. A has a steady well-paying job. He recently bought an apartment and managed to get loan approval within a week.

Hence, we ask, how to be prime and not sub prime?

1. Keep a sustainable and clean spending habit. If you have credit card(s), try not to have outstanding debts rolling over; If you have outstanding debts, it is good to keep up a disciplined plan to clear off the debts, starting from the ones charging the highest interest first. And, pay your bills on time.

2. Know how robust your debt-servicing ratio is. Know exactly what your long-term debts are: -

a. Housing mortgage

b. Car loan

c. Purchases done on monthly installments

As a general rule of thumb, your consolidated long-term debts should not constitute more than 35% of your gross monthly income. And, pay your bills on time.

3. Know your credit report- who can access your credit report?

a. Yourself- You can use your SingPass to access your credit file online at the CBS website at http://www.creditbureau.com.sg/

You can also go to the CBS office at #17-02 SGX Centre 2 or a SingPost office. Bring your photo ID or passport. Collect the file after five working days at the bureau or SingPost branch. It can also be sent to you by normal or registered post.

Getting your file costs $5 plus GST.

b. Financial institutions participating in Credit Bureau Singapore approved by Monetary Authority of Singapore (MAS).

4. Do not assume.

The last thing one should do is to adopt an ostrich mentality, as in “what I can’t see won’t hurt me”. Just like the example of Mr. B, if he had done a “thorough clean up” of the previous outstanding case, he might have already gotten the new bank loan.

If need be, conduct a self-check once every 3 to 5 years at a small fee of $5 plus GST per check.

5. Think in the shoes of your (would-be) creditors.

Well, you see, banks and financial institutions are conservative folks; they tend to avoid risk they cannot afford to take. Some even say the bankers only lend to those who do not need the money. It is a hard but true fact. And when bank officers call you to “chase” for overdue payment, be nice to them over the phone, and they usually will give you the leeway of an extra one to two days’ grace.

6. Be upfront about your situation

If you are engaging a financial advisor, credit counselor or mortgage consultant, be prepared to “wash your dirty linen” and come clean about your situation so help and solutions can be rendered to salvage the situation.

“Remember that credit is money.” Benjamin Franklin (one of the Founding Fathers of the United States of America)

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