10 Common Credit Score Myths To Bust

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There are a lot of myths and misconceptions when it comes to understanding how our personal credit score works. Is the score determined by Bank Negara Malaysia’s Central Credit Reference Information System (CCRIS)?

A credit score is a single score that represents how good your credit health is.  It is the most reliable way for you to tell you how good your financial standing is, and it also gives you an indication of whether a bank will approve your applications for loans or cards.

There are many things that you may think affects your score that actually doesn’t. Here are some of the most common credit score myths:

1. My age determines my credit score

The younger I am, the lower my score will be.
Age does not matter when calculating a
credit score. Your credit score depends on
various factors, such as payment history,
credit mix and loan balance, length of
credit history, new credit applications and
legal track record.

Age is not a consideration when you take a look at the breakdown of credit scoring. You may think that the younger you are, your credit score will be lower. In reality, it is not your age that matters, it is how well you manage your credits.

For example, using a credit card and paying the bill in full every month can help you establish a healthy credit score even if you are young.

2. My spouse’s credit score affects mine

My credit score will take a hit if my spouse's score is poor.
A credit score is based on individual
assessment, not as a couple.

If your partner had financial difficulties in the past, don’t let them stop you from marrying him or her! Your personal credit score will not be affected by your spouse’s bad credit.

However, when filling for joint credit, such as getting a joint home loan, your joint score may be lower than your personal score and affect your ability to secure the loan.

3. Avoiding debt altogether keeps my credit score healthy

My credit score will better if I am debt-free.
You actually need debt to establish
your credit score.

While living a debt-free life sounds like a good idea, it can actually make it harder to secure a loan when you need to. When creditors look for experience with debt management, they want to see that you can make consistent and on-time payments each month. It is to show that you are good at managing debts before they can decide to issue you the credit or loan. Having a history of doing so is the key to proving this.

It’s alright to have debts. If you are capable of paying all your debts on time, it won’t pose a problem to your credit score.

4. You only need to check your credit score once

I only need to check my credit score once.
It is advisable to check
your credit score every three months.

One important portion that makes up your credit score is your credit history. This is one area that can easily impact your credit score, but it is also the area that you can quickly improve on. The information used in this section is generated from your Central Credit Reference Information System (CCRIS) report.

Therefore, your credit score will change over time as you improve on your payments. It could also get worse if you miss any! To be on top of your financial health, it is recommended to check your credit score once a year.

5. Paying off a negative record means it is taken off my credit report.

The late or defaulted payment(s) previously
will be immediately removed from my credit
report once I have updated my payment(s).
Your credit report, which your credit
score is based on, stores your credit
record for up to 12 months.

Your credit report records up to one year of your credit history. Clearing off a debt does not mean negative credit records such as late payments are deleted from your credit report. They will be indicated as “paid” instead.

Your credit score considers your CCRIS report when computing a score. You can expect the negative record to have some effect until it is no longer shown in your report.

6. If I pay off my credit card balances on time each month, I will have a perfect credit score

A perfect credit score is guaranteed if you
make prompt payment(s).
Your payment history makes up 40%
of your credit score only. There are
also other factors considered in the
computation of your score.

It is always encouraged that you pay off your credit card balances in full and on time each month. However, it does not necessarily secure an excellent credit score for you. Other factors are taken into consideration. Factors like your credit mix, credit utilisation, credit history, legal track record, length of credit history, and if you are using too much of your credit limit.

If you charged RM9,000 on a card with an RM10,000 limit, your score will still reflect that you’re using 90% of your available credit, even if you make payment promptly. Comparatively, if you charged RM5,000 on the same card, your score reflects that you’re using only half of your available credit. You can offset this by requesting for higher limits or using several different cards to pay bills each month.

The lower your debt-to-credit ratio is, the better your credit score will be.

7. A low credit score affects my credit forever

A low credit score destroys my financial
standing forever.
Your credit score is based on your credit
history of the last 12 months. Over time,
you can improve your credit score by
managing your debts effectively.

Your credit score is not permanent and changes according to the progress of your credit management. Do what it takes to get healthy credit, and you will be offered better rates for your loans. Negative credit records in the past will matter less in time, as long as you are maintaining the higher score.

8. Closing credit accounts improves my credit score

Closing accounts that have already been paid
in full will improve my credit score.
Typically, closing your accounts may make
your credit history seem shorter, hence hurting
your credit score.

After paying off a credit card debt, you may think that it’s better to close the account. However, that move can actually hurt your credit score, because creditors look for experience with long-held accounts. If you have had that credit card for a long time, consider having it even after you paid it off, because it reflects well on your ability to manage credit over time.

9. Lowering my credit limit elevates my credit record

Lowering my credit limit improves my
credit score.
Lowering your credit limit increases
the chances of hurting your credit score,
as it becomes easier to utilise too much
of your credit.

Thinking of lowering your credit limit because you fear you might overspend and rack up a huge bill? Think again. By lowering your credit limit, you can hurt your credit score. You appear more credit-worthy if you are using only a small portion of your overall available credit, or having a low credit utilisation ratio.

In fact, if your total debt on a card approaches the credit limit level, then your score is negatively affected. However, beware, having a high credit limit can tempt you to charge more on your card, so self-control is vital here.

10. Amount of interest paid on the credit accounts affects my credit score

High interest rates are bad for my credit score.
The interest rates are insignificant to your credit score.

The amount of interest that you are paying on remaining balances for your credit accounts does not affect your score.

A proven record of sound financial behaviour and time will have the most significant impact on your score. It is wise to pay your bills on time, work to lower your debts and ask that any inaccuracies be corrected.

Understanding the real truth behind credit score myths will take you a long way in acquiring excellent scoring on your credit management. So, take time to take care of your credit score, and you will thank yourself when it is time to secure a big loan!

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