An individual consumer will have a credit record in a centralised consumer credit database once he/she has used a credit product such as credit card, personal loan, car loan, etc, offered by banks and financial institutions. More comprehensive credit information about a consumer in the centralised database helps banks to assess the consumer’s credit quality more accurately.
A credit report generally reflects an individual’s credit and repayment record (including default repayment records), bankruptcy and other public records (e.g. litigation for debt recovery), and records of enquiry by banks or financial institutions in the last two years. If a repayment defaults for more than 60 days, the consumer credit database will retain the default record for five full years from the date of full settlement. There is also a credit score ranging from A to J, where A is the highest score.
When reviewing applications for personal credit products (e.g. credit cards), banks consider various factors, which normally include the applicants’ credit reports.
Implications of a bad credit record
A good credit record may lead to a better interest rate and terms. In contrast, a consumer may be subject to a higher interest rate, or get a smaller loan approved, or even his/her loan application may be rejected if his/her credit record is not good.
A bad credit record may also have negative impact on non-financial matters of an individual. For example, in the job market, applicants’ credit records are also reviewed by some employers when assessing the applicants’ suitability for certain types of positions (e.g. accounting, credit analysis and approval-related work, etc.). Employers may have doubts about the applicants’ eligibility if their credit records are poor. Bankruptcy record may affect the approval of licence applications for certain professions, e.g. securities brokers, lawyers, etc.
As a wise bank customer, you should pay attention to the following smart tips when using personal credit products:
Applying for several credit cards or personal loans simultaneously may imply the applicant’s urgent needs for money. This may affect his/her credit score negatively.
Always make timely and full repayments for personal credit products. Otherwise, interest on late payments will be imposed and the borrower will be kept being reminded to repay.
Note the fees and charges when using personal credit products, e.g.
Don’t assume that “zero interest rate” or “full interest waiver” stated in personal loan promotional materials means there is no borrowing cost. Don’t just focus on the “monthly flat rate” and think that the borrowing cost is really low as the monthly interest rate is barely over 0%. Use the Annualised Percentage Rate (APR) to compare personal credit products offered by different banks.
If you intend to make an early repayment, check with the lending bank whether early repayment charge and any other fees will be imposed, and then compare this with the amount of interest to be saved before making your decision.
Don’t just make minimum payments in settling credit card bills. Beware of the snowball effect of interest accumulation in making minimum payments. If the outstanding balance is not fully repaid on time, new transactions will immediately incur finance change.
As a prudent bank customer, you should remember the following tips when applying for personal loans:
Before applying for a personal loan, you should understand thoroughly the terms and conditions, including types of loans, tenor, repayment schedule, monthly repayment amount, interest rate, method of interest calculation, and other related fees and charges. If necessary, you can enquire the bank’s staff or ask them to illustrate how the charges are calculated with reference to a mock loan amount. According to the Code of Banking Practice, in any advertising and promotional material for a banking service that includes a reference to an interest rate, banks should also indicate the annualised percentage rate, where relevant, and other relevant fees and charges; and provide full details of the relevant terms and conditions on request.
Compare the personal loan products offered by different banks using the Annualised Percentage Rate (APR). APR is a reference annualised rate that reflects the interest and other related fees and charges (such as handling charges and service charges) charged on a banking product (such as credit cards and personal loans). APR reflects the actual borrowing cost.
After borrowing, remember to repay your loan on time to avoid “late payment charges” and additional overdue interest charged by your bank. Late payment records of borrowers are maintained in the consumer credit data bureau. They will directly affect the borrowers’ loan applications in future and the interest rates for the loans.
If you intend to make an early repayment, you should check with the bank concerned whether any early repayment charge and any other fees will be imposed, and the amount of principal that you have repaid. Compare the early repayment fees and charges with the amount of interest to be saved before making your decision.
If you have difficulty in repaying the loan, you should discuss with your bank promptly and explore other repayment arrangements.
Don’t just rely on the information provided in personal loan promotional materials. Don’t assume that “zero interest rate” or “full interest waiver” means there is no borrowing cost. Don’t just focus on the “monthly flat rate” and think that the borrowing cost is really low as the monthly interest rate is barely over 0%. You should refer to the “annualised percentage rate” which can accurately reflect the actual borrowing cost.
Don’t just calculate the repaid portion of principal by simply multiplying the monthly repayment amount by the number of repayments that you have made. Even though the monthly repayment amount is the same throughout the loan tenor, more interest will, in general, be included in earlier repayments, and less on principal. You should ask your bank if you want to know how much principal you have repaid.
Think carefully before applying for a loan and avoid over-borrowing. Remember to repay on time after taking out a loan to avoid additional expenses on finance charges.
Personal loans offered by banks are mostly unsecured loans, that is, borrowers are not required to put up any personal assets as collateral for the loan. As such, unsecured loans typically have higher interest rates and shorter tenors than secured loans (such as a mortgage).
When considering whether to approve a personal loan application, the bank concerned will take into account the applicant’s background, occupation, income, financial condition and credit history.
Currently, there are mainly two types of personal loans, namely, instalment loans and revolving loans:
Interest for the total loan amount will normally be calculated based on a monthly flat rate. The borrower will repay the loan monthly with a fixed amount according to the interest rate, repayment schedule and repayment amount agreed with the bank.
Interest is calculated on the draw-down amount on a daily basis. The borrower can draw down, in whole or in part, the loan facility and repay, in whole or in part, the borrowed amount any time at his discretion. The available loan amount will automatically increase after each repayment so that the borrower can redraw the loan again. In general, a minimum monthly repayment amount is set for revolving loans. Moreover, banks will review the repayment record of the borrower regularly and may adjust the interest rates and/or loan amount accordingly.
Individual banks use different ways to apportion interest and principal in the monthly repayment amounts. The following example illustrates how the interest is apportioned in each monthly repayment throughout the loan tenor according to the Rule of 78:
A 12-month loan of HK$200,000 at a monthly flat rate of 0.31%
Monthly interest = HK$200,000 x 0.31% = HK$620
Interest for the full term = HK$620 x 12(instalments) = HK$7,440
Based on the Rule of 78, the amount of interest paid each month =
Interest for the full term
Remaining number of monthly payments
Sum of the number of monthly instalments in the loan (For 12 monthly payments, it will be 12+11+…+2+1=78)
The calculation is as follows:
The 1st month
HK$7,440 x 12 / 78 = HK$1,145
HK$17,287 – HK$1,145 = HK$16,142
The 2nd month
HK$7,440 x 11/ 78 = HK$1,049
HK$17,287 – HK$1,049 = HK$16,238
The 11th month
HK$7,440 x 2 / 78 = HK$191
HK$17,287 – HK$191 = HK$17,096
The 12th month
HK$7,440 x 1 / 78 = HK$95
HK$17,287 – HK$95 = HK$17,192
The above example shows that nearly 30% of the interest for the full term is repaid in the first two monthly payments.
By the same way, the above rule is also applicable to loans of other repayment periods. For a 24-month loan, the sum of numbers from 1 to 24 is 300 (24+23+22+21+20…+1=300). 24/300ths of the total interest is apportioned as the first month’s interest portion, 23/300ths of the total interest is apportioned as the second month’s interest portion and so on until the 24th month, at which time 1/300th of the total interest is apportioned as the last month’s interest portion.
Similarly, for a 36-month loan, the sum of numbers from 1 to 36 is 666 (36+35+34+33+32…+1=666). 36/666ths of the total interest is apportioned as the first month’s interest portion, 35/666ths of the total interest is apportioned as the second month’s interest portion and so on until the 36th month, at which time 1/666th of the total interest is apportioned as the last month’s interest portion.
There are many types of loan products in the market, such as personal loans, tax loans, etc. You should remember the following tips when applying for loan products:
Be responsible and handle personal loan products properly. You should commit to repaying after borrowing.
Repay the loan (or for card products, outstanding balance of retail purchase and/or cash advances) on time to avoid late payment charges and additional overdue interest charged by banks.
Before applying for any loans, you should have a clear understanding of your financial condition, daily expenses and actual borrowing needs. You should also assess your repayment ability and avoid over-borrowing.
Understand the terms clearly before committing to a loan.
To borrow or not to borrow? Borrow only if you can repay!
Do not overspend and get yourself in debt. This will affect your credit record.
Points to Note:
If your repayment defaults for more than 60 days, the consumer credit reporting institution will retain the default record in the database for five full years from the date of full settlement.
A good credit record may bring you better interest rate and terms. In contrast, you may be subject to a higher interest rate, or get a smaller loan approved, or even your loan application may be rejected if your credit record is not good.