Part of life is managing the ins and outs of your finances. Financial literacy is an important part of your wellbeing, and can spell the difference between stability and crisis.
Some of the financial knowledge that can help you includes how to save, make investments and seek financing.
Personal financing basically involves you seeking loans. Individuals usually seek financing like personal loans, car loans, home loans and more. Another widespread and popular type of 'loans' are credit cards.
If you take on loans, credit cards or any other type of debts, there will be a record of this in the form of credit reports. Credit reports also rate your behavior as a borrower i.e through your credit score.
What is a credit score?
In a nutshell, a credit score is a number between 300-850 that represents your creditworthiness and how likely you are to repay debt.
Factors that go into determining your credit score include your bill loan repayment habits, how much debt you have accumulated and others.
In Malaysia, credit reports are kept and prepared by various credit reporting agencies. These include Bank Negara Malaysia's Central Credit Reference Information System (CCRIS) and private companies like CTOS.
What is CTOS?
CTOS is a private credit reporting agency in Malaysia that keeps track of borrower habits. They are among the few that provide a credit score to better reflect one's creditworthiness.
CTOS obtains the credit related information from various public sources such as:
- National Registration Department
- Malaysia Insolvency Department
- Companies Commission Malaysia (CCM)
- Publications of legal proceedings and notices in newspapers and government gazettes.
CTOS provides credit reporting and is also widely used by financial institutions to determine an applicant’s creditworthiness.
The types of credit-related information featured by CTOS in their reports include bankruptcy, legal actions and case statuses.
You can get a copy of your CTOS report at their website, by signing up and making a request. A standard CTOS report containing your credit score costs RM25 each, with other service package options available.
Does it matter if I have a poor credit score?
The short answer is yes. An unhealthy credit score affects your chances of qualifying for future bank loans and credit cards.
Financial institutions will use the record of your debt repayment habits to decide whether or not to approve your loan/credit card application.
Aside from that, the credit score will also be used to determine how much interest you should be charged for financing plans. It will also come into play for other financial circumstances like increasing your credit card limits, renegotiating loan terms, refinancing programs and more.
Some employers also take your credit score into consideration when deciding whether to give you a job. Therefore, it is important that you keep your credit rating at a healthy level.
What should I do if I have a poor credit rating?
If you have a poor credit score, don’t panic. The key is to take action as soon as possible to improve your credit score. After you have successfully improved your credit score, you should then focus your efforts in maintaining a good credit score.
How do I improve my credit score?
Some may think that credit scores are complicated and difficult to understand. The guiding principal is simple.
As long as you improve your debt accumulation and repayment habits, your score will naturally increase.
We have compiled a list of things you can do to improve your credit score. If you follow these steps and adjust your spending habits, you’ll be well on your way to achieving an better credit reputation.
1. Verify that all the information on your credit report is accurate
You should always make sure they have correct and updated details so that your latest credit reports will be as accurate as possible.
Believe it or not, something as simple as having multiple addresses listed in your file could lower your rating and prevent you from taking out that loan. Multiple addresses may not be wrong or illegal, but it lowers the impression of stability and trustworthiness on your part.
Updating your personal details in credit reports can be a quick, hassle-free process as credit reporting agencies provide a step-by-step guide on how to correct your report inaccuracies, so be sure to contact your credit reporting agency for help.
Apart from addresses, ensure that all records of your previous loans and credit cards are accurate. This includes all the latest repayments you've made and debts you've resolved.
2. Pay off your debt
We understand that times may be tough for. However, it is advisable that you avoid defaulting on your debts and pay off your minimum on a monthly basis. You could also contact your lender to restructure your repayments so that they works better for you.
One strategy you can adopt is the snowball method, whereby you try to pay off your lowest debts first before moving on to the next largest one.
Another useful strategy is debt consolidation, whereby you combine all your loans together in one account, with a lower and more acceptable interest rate.
With credit cards, you can practice balance transfer, where you transfer all your unpaid balances to just one card. Check out the best balance cards, many of which have zero balance transfer rates.
3. Pay Your Bills and Instalments on Time
Do you tend to forget paying your bills or loan repayments? Not only does this pose a risk of penalty fees, you will also be damaging your credit score.
Time payments for loans and monthly bills show that you are a trustworthy payee. Even constant late payment for phone bills and internet bills can lower your credit score.
Poor payment habits show banks and financial institutions that you don’t have your finances under control, so be sure to mark your calendar and pay up when it’s time!
4. Check your financial relationships and take charge of your finances
Did you know that your financial behavior isn’t the only factor that can affect your credit score?
Your financial relationships with others can improve your rating, but it can also have an adverse effect. For example, be careful when you share bills or have supplementary credit cards. Late repayment on your supplementary cards would affect your credit score.
If possible, keep your finances separate because this will allow you better control over your own credit score.
5. Start building up your credit history
Some people have no credit score, and this may be just as bad as having a poor credit score.
You may be managing your money well, and have never found the need to get a loan, but a lack of credit history could actually be viewed negatively by credit rating agencies.
One simple strategy is to get yourself a credit card. Just make sure pick a suitable credit card for yourself. Read the fine print first and decide which credit card is best for your lifestyle and spending pattern.
You can use our free credit card comparison tool to help you to do this seamlessly. We highlight the reward schemes you could be benefiting from, and the main features of each card.
Always ensure that you pay off your outstanding balance at the end of the month, otherwise you will end up with a poor credit score, which is exactly what we’re trying to avoid.
Now that you know how your credit score is perceived by financial institutions, you can start to see why it’s crucial for your future plans.
Knowing your credit score gives you a better sense of what you can and cannot afford, and how banks see you as a prospective borrower. Therefore, you're advised to check your credit score and plan ahead. After all, it’s better to improve your financial health sooner than later!
Here at CompareHero.my, we take pride in helping Malaysians understand their finances better. Contact us to know more about our credit cards and how balance transfers can help you achieve a healthier credit score.