Having a good credit score seems like the golden ticket to some of the best financial deals: competitive and ideal interest rates, premium credit cards, and a higher chance of buying a car or getting a mortgage.
Unfortunately, the adverse effect of having a bad credit score – between 300 to 650 (poor to low) according to CTOS – is extreme. Having a bad credit score could lead to your applications for loans or credit cards being rejected. In really bad cases, you could even be denied a job.
Sadly, there tends to be a stigma attached to those who possess bad credit. However, we believe that having bad credit doesn’t equate to one being fiscally irresponsible because sometimes, life just happens - either in the form of medical bills or other unexpected emergencies, which almost always puts us in difficult financial positions. Other times, it’s our lack of knowledge on credit scores that end up hurting us in the long run.
With that said, it’s never too late to right the wrongs of the past, which in this case means improving a bad credit score.
But first, 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.
Believe us when we say that these are and will always be the three most important digits of your life. Financially speaking, at least.
If you didn’t already know CTOS is one of the three main Credit Reporting Agencies governed under the CRA Act 2010. They’re also registered to the Registrar Office of Credit Reporting Agencies, so you know they’re the real deal.
The reason why a credit score is so important is because it gives banks and lenders a better sense of how financially healthy you are, and how likely you are to repay your debt.
Since giving out loans means putting the receiver in debt, financial institutions can’t be giving out loans without making a thorough assessment of your financial health first.
To do this, banks and lenders would check up on each person’s credit score. The higher the score, the higher the chance of getting financing requests approved. Having a good credit score is good for you because this means that you’ll have more options to choose from as more banks and lenders will prefer dealing with you.
However, if your credit score isn’t quite at the optimal level, your retirement plans might have to suffer a bit of a delay, costing you more money in the future.
So before it’s too late, here’s a rundown on the 4 ways a bad credit score can impact your life and the 4 steps you can take to improve it.
Firstly, 4 ways a bad credit score can impact you
1. You could have a hard time securing a mortgage or rental
If you’re aiming to make your first home purchase at a certain stage in your life, be sure that you have a solid credit score by then as a poor score may reduce your chances of securing a home loan.
Similarly, if you’re looking to rent, be sure to polish up that score because landlords tend to prefer tenants who have good credit scores. So if your credit history isn’t that great, working on improving it could really help you get that house you’ve been dreaming of.
In these difficult times, landlords are also more likely to trust tenants who have a good track record of paying rent, bills, and debts on time. Therefore, it is not uncommon for them to vet through the credit score report of their potential renters.
Although we would advise you to reassess your finances and work on improving your score, we understand that you might be in urgent need of a rental. A short term solution for this would be to find places from small-time residential property owners.
At the end of the day, whether your application for a housing loan is successful or not depends on how trustworthy you look on paper, so build that credit score up and flourish!
2. Getting approved for a loan or a credit card will be difficult
Having a bad credit score will also directly affect your chances of securing a new loan or credit card application from most mainstream funders. The lower your score, the less likely you are to find a lender who would be willing to take the risk on you.
Unfortunately, this scenario is what usually drives unqualified loan applicants to seek financing from less-than reputable sources, such as loan sharks, pawn shops and payday loans.
Not being able to secure a loan also means that you would have to miss out on the great perks of a personal loan. Wave goodbye to debt consolidation, extra money for your wedding, or that renovation project for your dream home.
The fact of the matter is that banks lend you money to make money, hence they are forced to only lend to those who can pay them back.
Also, did you know that a failed application will show on your records, and could further diminish your chances of getting approved for another credit card for at least the next 12 months?
This fact alone would motivate us to improve our credit score! Our advice? Avoid frequent late payments for your other cards or loans, and ensure that you keep your debt-to-income ratio low without exceeding 40%.
3. You might end up paying more for your loan
Though having a bad score may not fully prevent you from securing a loan, it would mean that you won’t stand a chance to get competitive or favorable rates.
Despite getting approved for your application, a bad credit score could lead you to be offered a lower margin of financing with higher interest rates. These figures could sometimes come up to thousands of Ringgit over time!
4. You may experience trouble getting a job
A study has shown us that there is little correlation between employee credit and job performance. However, that doesn’t stop employers from looking up the credit scores of prospective employees during the hiring process.
Therefore, things like bankruptcy, delinquencies, or an inclination of racking up huge debts could put you in a tricky spot when you are looking for a job.
The truth is many companies still perform credit checks on potential employees as part of their background check. Other companies may perform these checks on employees who are considered for promotions, too.
In fact, we read that financial background checks are especially common with public-listed and multinational companies, as well as government-linked positions that are heavily involved with cash, corporate finance and bank accounts, client accounts and data, and financial IT software and systems.
Therefore, it would be in your best interest to maintain a good, if not healthy credit score, to avoid it backfiring or hurting your chances at advancing your career development. This is particularly true if you are in urgent need of a job.
Here’s a quick guide to how you can improve your credit score!
Read it in detail: How Malaysians Can Check And Improve Their Credit Score
Here are 4 ways you can fix a bad credit score!
1. Update your personal information
It may sound simple, but updating your latest personal information, such as outdated residential addresses can really make a difference, so check and make sure that credit reporting agencies have your updated details.
2. Get yourself a credit card
If your credit score isn’t too low yet, try applying for a credit card. Our tip would be to only use your credit card for little things, such as groceries and fuel, then pay it all back every month. This would slowly build your credit score up and you’ll be looking amazing on paper in no time!
3. Pay your bills and debt on time
As your payment history makes up 45% of your score, strive to pay your bills and debt on time. You don’t have to pay off your debt in one shot, but paying it off consistently every month will definitely do you good. For those who need a reminder on this, get a calendar or automate your payments. Missing payments will not only affect your credit score – you’ll have to pay penalties and late fees too!
4. Check your financial relationships
Who you trust with your money matters. Have you agreed to be someone’s guarantor? Are you sharing bills with someone else? Do you have a supplementary credit card? Be extremely mindful of your financial relationships with others as their poor repayment habits can bring down your score too.
Now that you know how your credit score is perceived by financial institutions, you can start to see why it’s so 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, we advise you to check your credit score and always plan ahead. After all, it’s always better to improve your financial health sooner than later!
Here at CompareHero.my, we take pride in helping Malaysians understand their finances better. Therefore, we are giving away 5,000 FREE credit score assessments every month!