Adulting Guide 101: What Are Financial Credit Scores And How Can We Improve It?
Just started a full-time job and finally got my own credit card? What should I know?
Applying and getting your credit card is the easiest part – banks generally want you to get one because the interest you might pay on those cards is a big income stream for them. So, after getting the card, time to think about your credit score.
Comfort zones are the major culprit here. It’s the familiar aspects of our daily lives that we have gotten very used to that we’re not willing to leave behind. Our unwillingness to leave our comfort zones behind also means that we are not exploring what’s new and unknown to us.
First up, what is a credit report?
Imagine you are applying to take a loan from a bank to purchase a car or a house. When you make an application, the banks will reach out to credit agencies to get a copy of your credit report.
This report contains very detailed information, such as your personal details, a record of credit accounts, bankruptcy filings, and a list of those who have pulled out your records previously. In Malaysia, CTOS and CCRIS Malaysia are the main providers of credit reports, both their websites have very insightful information on all things credit – do check them out!
Moving on, what is a credit score and why is it so important?
A credit score is a three-digit number between 300 to 850 based on your credit report (explained above) to show how good your credit health is. Lenders (e.g. bank or mortgage companies) use this credit score as a predictor of the likelihood you may not be able to repay a loan (i.e. default a loan).
Side note, defaulting on a loan comes with heavy consequences such as losing trust with lenders, damaging your credit score or legal actions might even be taken against you. So, avoid defaulting on a loan at all costs!
Back to the matter at hand, your credit score will decide whether a lender is willing to extend the loan to you and at what interest rate. The different banks have different ranges of acceptable credit scores. But, generally, a score between 650 to 750 is a good credit score and anything above 750 is considered exceptionally good. Imoney has summarized the evaluation criteria of credit scores very well.
If your credit score does not meet the bank’s standards, you may not be able to secure the loan or you may be charged a higher interest rate (the cost of the loan) as you are perceived as a high-risk borrower. In short, the higher the credit score, the better a borrower you are seen as a potential lender.
Oops, I made some errors in judgment. How do I fix my credit score?
Fret not, there are a few ways within our control as borrowers to fix our credit scores from ‘bad’ to ‘good’. Nonetheless, prevention is always better than cure – try not to get to a point where you have to ‘fix’ your credit score. With that in mind, here are some ways we can improve our credit scores.
1. Pay your outstanding debts on time.
I’m referring to any loan installments, payments made on your credit card, or utility bills. One helpful tip, set a recurring reminder for the due dates for all repayments – monthly repayments are usually due on the same date every month. Consistently paying your bills on time is one of the most effective ways to revive your credit score or give you a head start in building a good credit score.
2. Limit your debts and debts account
Every credit card has a credit limit (the maximum amount you can borrow on credit). For those earning above RM36,000/year, the banks issuing the credit card decides the threshold, whereas, for those earning under RM36,000/year, the threshold is set at twice the amount of your monthly salary.
How much of the credit you actually use is referred to as a utilization rate. Generally, a utilization rate of around 30% of your total threshold is a good percentage. This indicates to potential lenders that you are spending within your means every month.
Another helpful tip – during the months you’ve made bigger purchases (e.g. buying electronics, furniture, or lumpsum gym membership payments). Perhaps you could pay more than once in your billing cycle. Let’s say you have an RM6,000 threshold on your credit card, and you know that the last day of your monthly statement is on the 28th of every month.
So, if in September you bought an RM3,000 sofa on credit, try to pay off at least RM1,200 before 28th September. Then, the amount reported to the credit bureau on the closing day will be RM1,800 – a 30% utilization rate.
3. Diversify your accounts.
A good credit mix adds to your credit score. So, have a mix of installment credit, such as car loans, mortgage loans; and revolving credit, such as credit cards.
4. Do not close off unused credit.
Surprised? The age of your credit history matters a ton! The longer the credit history, the better! Closing older accounts and opening newer ones lower your credit score. So, if it doesn’t cost you, be loyal to your old flame *ahem* I mean an old account. Keeping these older accounts can show your extensive history of repayments to boost your credit score.
Congratulations on coming to the end of the article, you’re one step closer to being a full-blown adult! Having said all that, there is no need to over worry about your credit score. If you pay all your debts on time, you’re good to go!
For further reading on credit and other financial topics, give these articles on Do I Really Need To Own A Credit Card In My 20s? and 6 Easy Steps To Start Saving More Money.