Everything you need to know about your credit health.
Credit score matters. It matters even more than you think. It’s a key building block to your overall financial health and success. However, many Malaysians lack an understanding and awareness of this national credit rating system unless they require credit to apply for a loan or a credit card.
Nonetheless, it’s never too late to start learning about your credit score and the steps you can take to improve it. A good credit score will better position you to unlock your full credit potential and achieve your financial goals.
In this guide, we will provide you with a breakdown of your credit score and how you can begin to build your credit score for a better financial future.
What Is a Credit Score?
A credit score is a three-digit number ranging from 300 to 850 used by lenders to determine the overall credit standing of individuals and their payment history. It represents the state of your credit health which contributes to your creditworthiness.
Credit scores are calculated based on the information in your credit reports. When evaluating credit scores, lenders usually look at your repayment history, the status of outstanding debt which includes tenure, credit type and loan amount as well as the latest applications.
Why Does It Matter?
Your credit score matters because it makes or breaks your loan or credit card applications! It’s an indication of your repayment capability, attitude, and behaviour. You can think of it as your three-digit financial report card which represents the risk a lender takes when it lends you money.
Having a healthy credit score will not only improve your chance for loan and credit card approval, but also qualify you for the best interest rates on your applications.
How Is Your Credit Score Calculated?
Your credit score is calculated based on an algorithm that scoring agencies such as CCRIS and CTOS use from the information gathered from your credit report.
Most of us only think about the role financial institutions such as banks, credit card companies, and other lenders play in approving people for the credit they need. Little do they know that these institutions also play a collective role in sharing information with credit agencies about consumers’ credit behaviour, which is then compiled into credit reports. It contains your financial information such as outstanding credit, loans, credit card and loan application history, payment history etc. In short, it’s a summary of all your financial activities throughout your life. Your three-digit credit score ranges from 300 (poor) to 850 (excellent).
What Are the Factors That Will Impact Your Credit Score?
The following 5 factors are taken into consideration when calculating your credit score:
1. Payment History
It’s one of the most important factors which makes up 45% of the score. It shows lenders whether you’ve been consistently making on-time payments – an indicator that you’re likely to pay back your debts in the future. For this reason, just one or two late payments could significantly affect your credit score.
2. Loan Amounts Owed
This factor makes up 20% of your credit score. It refers to the total amount owed to the banks and other financial institutions.
3. Credit Mix
This refers to the types of loans and credit cards you hold and it makes up 14% of your score It’s advisable to hold different types of debt as this will increase your credit score. Also, having more open credit accounts leads to a better credit score because it means you’ve been approved for credit by more lenders.
4. Credit Inquiries and New Credit
These two combined factors contribute to 14% of your score. Each time when you’re applying for a credit product, the lenders will pull your credit report and each inquiry is documented on the report. Frequently applying for credit especially in a short amount of time is a red flag for lenders. It implies you’re in a precarious financial position and most likely are going to default on your loan.
5. Age of Credit and Established Credit History
Your credit history refers to the duration of time you have held a credit facility, be it a loan or a credit card and it contributes 7% to your credit score. Factors that feed into this element of your credit score include how long all of your credit accounts have been open (the age of your oldest account and latest account, plus an average age of all your accounts), how long specific credit accounts have been open, and how long it has been since you used each account.
A short credit history leaves very little trace of your financial track record, which could lower your credit score. This is a common situation faces by younger people who haven’t had time to establish a line of credit.
Where You Can Check Your Credit Score?
It’s advisable to check your credit score once a year to help you know right away if you’re making progress, or if something is pushing your score down. Keeping track of your score allows you to take proactive measures to improve your score.
Following are the 3 main agencies providing credit scores and reports in Malaysia:
1. Central Credit Reference Information System (CCRIS)
This is the main credit agency created by Bank Negara Malaysia (BNM) and is managed by the Credit Bureau of Bank Negara Malaysia. Its report holds individuals’ profiles and financial behaviour such as loans applied for, and credit details like outstanding balance. However. It does not provide a credit score.
The report is available to financial institutions and individuals upon request via email, fax, or post. You can also visit their Customer Service Centres located across Malaysia to obtain the report for yourself.
For more information, pay a visit to their website here.
2. Credit Tip-Off Service (CTOS)
This is a privately-run organisation that prepares credit reports for use by commercial organisations. CTOS uses the globally recognised FICO score- an internationally accepted process for credit score checks to calculate your credit score.
The report generated by CTOS showcases your credit history and your financial health. CTOS provide a free basic report to individuals, to assess a more comprehensive and detailed report, you will need to purchase it at RM25.
You can visit their website here for more information.
3. Experian Information Services
Previously known as RAM Credit Information (RAMCI), this is also a privately-owned consumer credit reporting company that has its own credit score rating named i-Score. Experian’s personal credit report also includes banking information (CCRIS), non-banking information, PTPTN, ANGKASA’s SPGA, identity protection and more.
Visit their website here to find out more.
How Do You Improve Your Credit Score?
Now you have gained an understanding of how your credit score is calculated and the factors that impact your credit score, you can take the next step to improve or strengthen your credit score by following these tips listed below:
1. Always Make Your Payments On-Time
Since your payment history makes up the majority of your credit score, hence it’s a no-brainer to make this your priority. Making payments on time reflects your capability of managing your finances effectively.
2. Review Your Credit Report Regularly
Staying on top of your credit score status will help you track your progress or find out if something is pushing your score down. It will also ensure everything on your report is up-to-date and without any inaccuracies.
3. Keep Your Debts Low
It’s advisable to reduce your financial obligations and keep your debt-to-credit ratio at 30%. This will help you to appear more favourable in the eyes of lenders.
4. Build Up or Fix Your Credit History
Having no credit history at all can be just as bad as having a poor credit history. You can start by applying for credit cards and using them responsibly to build up your credit history. On the other hand, if you need to start taking immediate and proactive actions to fix your credit history before it’s too late.
Want to know if you’re eligible to apply for a loan? Talk to our advisor to find out more.
Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.