A good credit score can help you achieve important milestones in life – like getting a loan for your home, buying a car or starting a business. However, there are many misconceptions out there about how credit scores work. Here are the most common credit score myths that you should be aware of.
Your credit score plays a vital role in your financial life, especially when it’s time to make major decisions like purchasing your first house, getting a second family car or becoming an entrepreneur. In these scenarios, you might have to apply for a bank loan or credit card, and your credit score is among the key factors that will be taken into consideration when the banks are reviewing your applications.
Since these financial institutions do not know you well enough to gauge your financial health, they refer to your credit score to gain a better understanding of the potential risks that come from lending money to you. Ranging from 300 to 850, a credit score represents how likely you are to repay debt, and having a good score will mean fewer hurdles to clear when you’re obtaining a loan, or being approved for a credit card. It can also help you attain lower interest rates and flexible payment periods.
While the benefits of having a strong credit score are aplenty, there might also be some misconceptions about how credit score works among the public. It’s not surprising as we have three recognised and reputable credit reporting agencies in Malaysia, including Bank Negara Malaysia’s Central Credit Reference Information System (CCRIS), CTOS Data Systems (CTOS) and Experian Credit & Information Services (formerly known as RAM Credit Information) – with each organisation applying different approaches to compile our credit history, report and scores.
So differentiating between fact and fiction is the first step towards understanding your credit score (don’t worry, it’s not difficult). Let’s clear up the misconceptions now.
1. FALSE: High salary equals a high credit score
It’s easy to make this mistake: the more money you earn, the higher your credit score is, right? Actually, your salary does not directly affect your credit score, as credit rating agencies use other criteria for evaluation. For instance, CTOS will calculate your credit score based on:
- Payment History (45%) – Whether you pay your loans on time or have missed any payments in the past.
- Amount Owed (20%) – The number of credit facilities (credit cards/loans) and the amount that you currently owe to the banks.
- Credit History Length (7%) – How long you have held a credit facility.
- Credit Mix (14%) – The type of loans and credit cards that you currently hold, including secured (home/car loans) and unsecured credit (credit cards/personal loans).
- New Credit (14%) – If you have recently been approved for loans/credit cards.
However, while your salary does not impact your credit score, it’s still a factor that will be taken into consideration when you apply for a loan/credit card. After all, the banks need to make sure you have the financial capacity to service your loan and credit card bills. So your application approval will be based on different aspects, including your income and credit history (which will be compiled into a document called credit report, and that’s where your credit score is derived from).
2. FALSE: Anyone can access my credit score and credit report
According to Bank Negara Malaysia, if a financial institution unlawfully accesses a credit report, the financial institution can be subject to severe penalties under the Central Bank of Malaysia Act 2009. Meanwhile, in the CTOS FAQ section, the organisation has also asserted that your consent is required before any credit reporting agencies can release your report to third parties.
So you can rest assured that your credit information remains private and confidential within the databases of Malaysia’s recognised credit reporting agencies.
Don’t worry, credit reporting agencies will never release your credit information to third parties unless you give your consent.
3. FALSE: Credit reporting agencies can decide whether to approve my loan/credit card applications
No, credit reporting agencies don’t make lending decisions. In fact, agencies such as CTOS have stated that it can only provide credit information to you, and any decision regarding the approval or rejection of a loan/credit card application is done by the lenders themselves (banks and financial institutions).
Even Bank Negara Malaysia has emphasised that it is not involved in any financial institution’s lending decisions, as its CCRIS reports only provide factual information.
4. FALSE: I have no credit score. That shouldn’t be a problem right?
Some people have no credit history (and thus, no credit score), as they have never needed to borrow money or use a credit card yet. Your parents might have helped to pay for your university fees, or you may have gotten a scholarship. Maybe you don’t need a car at the moment and public transportation is sufficient to meet your current travel needs, especially in today’s work-from-home climate.
However, unless you have tens of thousands of ringgit within reach at all times, chances are you’ll eventually have to apply for a loan at some point in your life. For example, you may need to pay for your education (upskilling and reskilling courses, master's degree, etc.) or purchase a car and home later on.
When that day arrives, the lenders (banks and financial institutions) may perceive you as an inexperienced credit consumer with no history of borrowing or repaying money. It might be harder to qualify for loans, and if you do, there’s a chance that you could end up servicing a higher interest rate.
To remedy the situation, you can start building a good credit score by opening a credit card account. If you use your credit card responsibly and pay off your bill in full each month, you would have established a record of prompt bill payments, which will turn up in the credit reports that are generated by credit reporting agencies.
If you use your credit card wisely and pay your bills on time, you’ll begin to establish a positive credit history.
5. FALSE: I’m only 21. I don’t have to worry about my credit score.
Currently pursuing a university degree? Just started your first job? Well, whether you’re finishing up your education or working, this is an exciting time as you’re about to enter adulthood. It’s a phase in life where most of us begin to become financially independent.
You’ll soon have to learn how to manage finances on your own when it’s time to purchase your first car, health insurance and other necessities. There are various money lessons to pick up as you navigate through your first bank loan application (most likely, to buy your first car) and credit card application (perhaps, as a financial backup during emergencies).
This is the stage where you can start building up your credit history, and as mentioned in the previous point, if you pay your bills promptly, you’ll be able establish a track record of on-time payments. The earlier you start, the more prepared you will be later on in life, when you are making bigger financial decisions like applying for your first home loan. By the time you’re ready to buy your first house, you’d have achieved a strong credit score, thus increasing the likelihood of your loan being approved.
So there you go – we have just debunked some common myths about credit scores. It’s time to leave these misconceptions behind as you work to improve your creditworthiness. By the way, do you know of any other credit score myths? Feel free to share them with us on Facebook, Instagram or Twitter.