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Doing These Things Will Hurt Your Credit Score

Credit scores play a significant role in measuring our financial health. A healthy score can increase your chances of getting a loan and qualifies you for the best interest rate. Meanwhile, bad credit may make it hard for you to reach your financial milestones in life like getting your auto loan or mortgage approved.

As you’re excited about having your credit score increase, you should be equally alarmed about the reasons for the drop too. Your credit score changes over time depending on how well you treat it. But before we go deeper on what affects your credit score, let’s try to understand what a credit score actually is.

What is a credit score?

A credit score is a three-digit number between 300-850 that represents your credit rating. The banks will subjectively evaluate your repayment capability by looking at your credit scores. The better you score, the higher the potential of getting a loan approved by the banks. Too low of a score can close the doors to many financial opportunities.

Source: HongLeong Bank

There are mainly three credit report providers that exist in Malaysia and licensed under the Credit Reporting Agencies Act 2010.

  • Central Credit Reference Information System (CCRIS) managed by the Credit Bureau of Bank Negara Malaysia
  • CTOS Data System
  • RAM Credit Information (RAMCI)

CCRIS is under Bank Negara Malaysia while RAMCI and CTOS are two private companies that also provide credit reporting. Different agencies possess different methods of calculating your credit score. So your credit score will be different across these agencies.

What causes my credit score to drop?

Building a good credit score doesn’t happen overnight but it can all be undone very easily. There are many ways could potentially damage your credit score. Here’s a list of them below:

Missing your payment

Making your payment on time is super crucial in achieving a good credit rating. You can keep your credit balance low or being responsible for spending. But all those can be good for nothing if you’re not a good paymaster. One missed payment can negatively affect your credit score. A late credit card or any instalment loan payment will stay in CCRIS for twelve months. Plus, most banks do not favour those with a habit of paying late. If you can’t be on time with your payment with a bank, you’re surely going to be late on the payment for another bank as well. This means, there’s a high chance that you’re not going to get your next loan approved.  

Carrying high credit balance

Carrying a balance is necessary to build a healthy credit score. But, you are hurting your credit score if your balance is on the higher side. A high amount of debt doesn’t necessarily translate to a high credit balance. An RM2000 debt isn’t essentially worse than an RM500 debt. A high credit balance can be the result of your evolving credit balance relative to your available credit. You can have a high credit limit but low credit balance if you commit to paying back the full amount on time every month.

Having a high credit balance can be devastating. It could head you for a lower score too. You should aim to keep your credit utilisation below 30% of your limits. Try not to go above 30% for every credit card you have since you’ll be perceived as risky by the banks.

Standing as a guarantor

When you be a guarantor to help out family or friends with poor to no credit rating, you are automatically being liable for the debt as well. The account that you co-sign will appear on your credit report. Since you’re being held responsible for their debt, your credit score will be heavily affected if the person is being irresponsible with the payment. But if the person pays on time each month, it could eventually help to increase your credit score. For that reason, be cautious when standing as a loan guarantor. Consider co-signing only for someone you truly trust.

Defaulting on a loan

Living on a mountain of debt can be devastating. Some debts can stay with you for a lifetime. At some point in life, people will find themselves unable to pay all those overwhelming loans. That’s when a loan default occurs. Defaulting on a loan means you have failed to repay any credit card or loan payment according to the initial terms. It can be due to missed or defaulted payments. In return, this damages the credit score and reduce the chances of getting credit in the future.  

If there have been six months of loan default, a person can be declared bankrupt by the bank. Most bankruptcy cases among Malaysians are due to outstanding car loans. Filing for bankruptcy can seriously damage your credit score. The banks will now compare your credit score with those who haven’t filed for bankruptcy.

Thus, try to avoid defaulting on a loan if you’re falling behind your payments. Contact the banks and restructure your repayment schedule.

Having too much credit at once

Having too many credits in line does not only hurt your credit score but also can make you appear risky to banks. More credits in hand increase the combined credit limit and lower the overall credit utilisation ratio. You’ll find it more challenging to control your spending and keep track of the payment due dates when you possess multiple credit accounts.

Avoiding credit

Most of the time, we think that it is good to have no debt. But, having no debt records at all isn’t great either. Why? Most banks will look at your credit score to see whether you can pay off the money owed promptly or not. Without a credit history, the lenders will find it hard to trust their money with you. Avoiding credit means there will be no information for them to evaluate your repayment behaviour. Hence, you need to apply for a loan to exist in CCRIS. This will ease your process of buying a new car or owning a house soon.

Conclusion

The best way to keep a healthy credit score is by exercising good financial responsibility with your debt repayment. If you’re making your payment on time and being a responsible credit card holder then you are on your way to acquiring a better credit score. Maintaining your credit score in a healthy state can set you up for great deals and low-interest loans in the future. Establish a good repayment habit and eventually, the three-digit number will work to your advantage.


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