In Malaysia, most people don’t worry about their credit score until it is too late. Reports released by the Bank Negara Malaysia in 2019 have thrown light onto the Malaysian household sector.
The data indicated that the percentage of Malaysian households suffering from debt due to personal loans, vehicle purchases, credit cards, housing loans, or others is 45.7%.
Interestingly the credit card and personal financing debts have grown to 104% and 43% in 2018 compared to the year 201.
Worst of all, 69% of the borrowers belonged to the age group from 25 to 34.
What is a credit score?
Your credit score is a critical financial indicator that can affect your ability to secure loans, credit cards, and even impact your mortgage rates.
In simple words, a credit score is a three-digit number between 300 and 850, which represents the likelihood that you pay back your bills on time.
This is calculated using the information from your credit reports, such as your payment history, the amount of debt you have, etc.
A higher score means that you have shown responsible credit behavior in the past. This gives better confidence for creditors while evaluating your credit request.
The list below shows the grade of your credit report based on the score.
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
What is the importance of credit score?
Wondering why it is necessary to achieve a higher credit score? Maintaining a good credit score is essential for financial stability.
Well it is simply because good credit scores can provide you with more favorable credit terms. Credit scores give money lenders an idea on how responsible you are in managing your finances and paying back the debt you owe.
A good credit score can open doors that you have never dreamed of existing before.
This can help you to get:
- Low-interest rate on credit cards and loans.
- It gives more negotiating power.
- Better chance of loan approval.
- Easy approval for higher limits.
- Better insurance rates and even.
- Avoid security deposits.
The credit scores greatly vary according to the scoring model and how the credit bureau furnishes the credit report used for the data.
Say, for example, if you are applying for a loan to buy a new property, your financier uses a credit score that is more relevant to your payment history when it comes to property loans.
How long does it take to repair a credit score?
The time duration to repair your credit score is related to several different factors. It primarily depends on what your goals are and the extent of damages that you have to fix.
If your credit report has too much negative information such as bankruptcy, late payments, or other forms of injury, the best thing to do is pay your bills and wait. There is no quick fix, and your credit scores will improve with time.
To give you a rough idea of how much time it takes to heal a bad credit score, we have listed out a few:
- Public record items remain on credit reports for seven years.
- Bankruptcies remain for ten years.
- Inquiries will remain on your report for a minimum of two years.
Factors that affect your credit score
Several factors influence your credit score. Understanding these factors is crucial for improving your creditworthiness:
1. Payment history
Your payment history accounts for a significant portion of your credit score. It reflects whether you’ve paid your bills on time. Late payments can negatively impact your score.
2. Credit utilisation
Credit utilisation refers to the percentage of your available credit that you’re currently using. High credit card balances relative to your credit limit can lower your score.
3. Length of credit history
The length of your credit history is a measure of how long you’ve had credit accounts. A longer credit history can positively impact your score.
4. Types of credit
Having a mix of different types of credit, such as credit cards, mortgages, and instalment loans, can positively affect your credit score.
5. Credit inquiries
Each time you apply for new credit, a credit inquiry is recorded on your report. Too many inquiries within a short period can hurt your score.
Steps to improve the credit score
Understanding your current credit score is the first step in improving it. Along with this, you will get all the information regarding the factors affecting your score.
The risk factors will give you a clear cut idea of all the changes you have to incorporate to improve the score.
Once you have made the changes, leave a certain amount of time for the system to reflect the changes.
Certain credit score factors are more important than others such as credit utilization ratio and payment history.
These are essential elements that are considered in many of the credit scoring models. Both the payment history and credit utilization ratio together take up to 70% of the credit score.
If you wish to improve your credit score, here are some important tips that you could follow.
1. Pay your loans and bills on time
This is a fundamental aspect of improving your credit score. Lenders assess your past payment behaviour as an indicator of your future performance.
When you submit your application for loans, the first thing that they want to know is how reliable you are in paying back the amount.
This is usually done by reviewing your credit score, which gives the lenders a rough idea of your past payment behavior.
Good past payment performance is taken as a good predictor for future performance.
If you plan to improve your credit score, you could start by paying back all your bills and loans on the agreed time. These include credit card bills, student loans, phone bills, electric charges, rent, utilities, water bills, etc.
Late payment and settling less than what you originally agreed will harm your credit scores.
There are several online resources for transferring the payment automatically. You could set up your bank account to transfer the fund automatically on a specified date.
Additionally, several online calendars are available to notify you of repayment dates.
If you are behind on payments, try to bring them to a current status as early as possible. Although the late payment appears as negative information on your credit, its impact on your credit scores diminishes over time.
2. Check your credit report for any inaccuracies
Regularly review your credit report to identify discrepancies such as unrecorded repayments or incorrect debt amounts. Often it is noted that people fail to recognize the inaccuracies in the credit report until it is too late.
Ensure that you verify all the information listed on your credit report does not contain any incorrect information.
Some of the credit inaccuracies include:
- Repayments that are not recorded.
- Duplicate debt listing or incorrect debt amounts
- Incorrect debt amounts
By cross-checking your credit report against financial documents and bank statements, you will be able to spot any inaccuracies on your credit report.
If you happen to note any inaccuracies on the report, you can contact your credit provider to amend your report.
3. Apply for new credit accounts only in case of need
Avoid unnecessary credit applications. Excessive applications may convey desperation to creditors. If you plan to apply for a new loan, make sure that you do so only if you need it.
Don’t make multiple credit applications in a short time interval as it will give the creditors a wrong impression that you are desperately looking to borrow.
On the other hand, applying for credit to restructure and pay back your debt can improve your credit score. For example, a personal loan to consolidate debt or applying for a credit card with a balance transfer offer can give a push to be on top of debt.
But do keep in mind that you will have to genuinely pack back your debt and not shift it around. Your money lender may consider it as a red flag if they come to know that you are applying for loans simply to shift it around.
4. Ask for assistance if needed
If you are struggling to pay back your loans and bills, you can seek help from your credit provider for financial assistance.
Additionally, you can contact financial counselors as well. Many of them provide free and confidential services to develop a budget and negotiate with your creditors.
Never fall prey to companies that offer to clean up your negative credit for a charge. It is not possible to remove the information on your credit report.
5. Try not to close unused credit cards
Closing old credit cards might hurt your credit score, particularly if they have a long, positive history. These accounts add to your credit history length, so it’s often better to keep them open as closing an account can increase your credit utilisation ratio.
It is a brilliant strategy to keep your unused credit cards open if it does not cost you money in terms of annual fees.
Your credit scores may get lowered if you owe the same amount but have a few open accounts.
6. Lower the limit of your credit cards
If you have any credit cards in your name, consider reducing the credit limit. This will help you to prevent excessive debt accumulation and showcase your financial discipline.
The benefits:
- Improve your credit score &
- Put a tight hold on to the extent of debt you can acquire.
7. Improve your credit utilization ratio
The credit utilization ratio is calculated by adding all your credit card balances at a particular time and dividing that amount by your total credit limit.
Say, for example, if you charge about RM1,000 monthly and your total credit limit across all your credit cards is RM 10,000. Your credit utilization ratio is 10%.
To have an idea about your credit utilization ratio, take a list of all your credit card statements for the past 12 months.
Add the balance statement across each card and divide the number by 12. This is the average use of your credit every month.
If you have a low credit utilization ratio, your credit score will be better and vice-versa. This will also show that you are good at managing your credit.
You can improve your credit utilization ratio by:
- Keeping your credit balance low.
- Paying back your loans and bills at the right time.
Frequently Asked Questions
What’s a good credit score?
Typically, a good credit score is between 690 and 719. This range, varying by agency, indicates responsible credit use and aids in securing favourable loans and rates.
How often do I check my credit score?
Check your credit score yearly with each major agency. This detects errors, fraud, or negative trends needing attention.
Can I boost my credit score fast?
Credit score improvement is usually slow. Quick tactics exist, but major boosts take months or years. On-time payments and lower credit card balances are slow yet effective.
Impact of late payments on credit score?
Late payments significantly lower your credit score. Payment history is crucial; even one late payment can drop your score, with more damage from recent or frequent late payments.
Soft vs. hard credit inquiry difference?
Soft credit inquiries, like self-checks or employer reviews, don’t affect your score. Hard inquiries from credit applications can temporarily lower your score.
Does credit counselling help improve credit scores?
Yes, credit counselling can improve your credit score. Counsellors offer advice on debt, budgeting, and credit-building strategies. They assist in planning to overcome financial hurdles and enhance your credit profile.
Final Words
Improving your credit score is a journey that requires patience and a keen eye on your finances.
Credit scores are estimated using complex calculations. In this article, we have mentioned several tips to improve your credit score.
If you are struggling with a low credit score, the first thing to keep in mind is that a low credit score doesn’t mean the end of the world.
Remember, a low credit score doesn’t spell the end; with time and strategic actions, you can gradually rebuild your creditworthiness.
Remember, when it comes to healing a bad credit score, time is your biggest ally. Be patient and have a thorough check on your spendings.
Carefully evaluate all your previous credit reports to see the exact reason for your low score. Additionally, you could follow one or many of the tips mentioned here to gradually build your credit score.
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