Can A Bad Credit Score Affect Your Family?

credit score and your family

Strictly speaking, no. Your credit score is unique to you and the same goes for your spouse.

However, there are indirect consequences to your family if you have a weak score. Here’s how your score can impact or even derail your financial goals as a family.

Credit and loan applications may get rejected

A lousy credit rating may not have any bearing on your spouse’s credit health or even those of your parents or siblings.

But having a bad credit report will prevent you from getting access to financial services and products when you need them the most. Here are some common reasons why your credit score matters when it comes to your family’s wellbeing.

1. It could mess up your child’s education

Paying for education can be expensive these days.

A study by HSBC Bank had revealed that over 50% of Malaysian parents it surveyed had resorted to taking up loans to pay for their children’s university education. The study also showed that Malaysian parents spend an average of RM109,470 to fund their child’s education from primary school up to university undergraduate level.

Average parental spend on a child’s education (USD)
Hong Kong
Source: Higher and higher, HSBC’s The Value of Education report, 2017.

While there are other forms of education aid such as the National Higher Education Fund Corporation (PTPTN) and private as well as public scholarships, most parents end up footing the bill of educating their children, often resorting to taking up personal loans or through refinancing their property investment.

However, a bad credit score of either parent can become an obstacle in securing that loan needed to pay for tuition fees, especially if you are applying for a loan as a couple. Without getting the loan approved, your child might end up having to forego the school or university place offered if you can’t afford to pay the fees.

2. Unable to pay for medical treatment

Cost of treating critical illnesses today is simply astronomical.

The upfront costs of medical treatments can be too large to pay out of your monthly expenses budget. For example, radiotherapy costs RM50,000 per cycle and chemotherapy will set you back RM75,000 per cycle while a life-saving heart bypass procedure costs RM80,000.

Most people find themselves with inadequate medical insurance coverage, or worse, uncovered! Cash is crucial at this stage as most basic medical insurance does not cover hidden costs such as income replacement for the caregiver, alternative treatment, transportation, additional medication and supplement or even costs involved in recovery such as rehabilitation or physiotherapy.

When faced with medical emergencies like these affecting your family, getting an urgent personal loan or emergency line of credit can become a nightmare if you have poor credit rating.

According to a study by the George Institute for Global Health on the financial impact of cancer in Southeast Asia, a cancer diagnosis can be potentially disastrous, with 48% experiencing financial catastrophe (out of pocket costs exceeding 30% of annual income) just one year after a diagnosis of cancer.

If you are forced to pay for these treatments out of your own pocket, it could wipe out your life savings. Financial institutions always consider the amount of risk before agreeing to lend you money but if your credit score is too low, your application might get rejected outright, leaving you with very limited financial options

3. Prevent you from owning a car or a home

Big ticket expenses like buying a car or a house usually require that you enter into a long-term contract with a financial institution.

If you are buying a car for your family’s transport needs, this involves getting a hire purchase loan to cover a maximum of 90% of the cost of your car.

Example: To own a new Proton Preve, here’s the financing you need.

 PriceFinancing amount of 90%Interest rateTenureMonthly instalment
Proton Preve 1.6 CVT ExecutiveRM61,090.94RM54,981.853.5% p.a.5 yearsRM1,076.71
Source: Proton loan calculator

Coming up with the RM54k will be a problem if you can’t secure a hire purchase loan due to a bad credit score. Even if you do finally secure a line of financing, chances are you’ll be paying more in interest as banks might fix a higher interest rate to lend you money, or your financing amount may be less than 90% due to the higher risks involved.

If getting a loan to buy a car is already a struggle, trying to house your family under one roof will be much harder. Regular salaried workers already find it hard to afford a home, so what more if you have a bad credit rating?

Based on the current market rate of 4.5% p.a., here’s how much interest is charged for a standard home loan with a 10% down payment for the property.

Monthly instalment payable for home loan
(4.5% p.a. interest rate, 35-year tenure)
Purchase price
Down payment (10%)
Mortgage amount (90%)
Monthly instalment
Source: home loan calculator 

If your credit score is bad, the interest rate charged for your home loan will likely be higher if it gets approved. Higher interest rate means that you pay higher monthly instalments, which gets you into a bigger debt trap.

When does your credit rating directly affect your family?

1. When you take on joint loans with your spouse

While getting married or divorced will not directly affect your respective credit scores, any loans you co-sign with your spouse for a mortgage or loan will impact both of you if there are any incidents of late or non-payment.

However, any debts you take out jointly will be reported on both your credit report and your spouse’s. This is because the payment history for joint loans and mortgages will show up in both your individual credit reports.

The same goes when you apply for joint credit facilities. Your lender will check both your credit histories individually before coming to a decision on your loan application. If you or your spouse have a lousy score, the application might not be approved.

2. When you act as guarantor for your child

Signing on the dotted line when your child applies for a student loan or a subsidiary credit card can have far-reaching financial implications so make sure that your child understands the responsibility.

Co-signing as a parent will directly affect your credit score as both of you are equally responsible for the agreement your son is entering with the financial institution. Being a guarantor will affect your credit score as it will show up as a liability in your report if you are unable to make repayments on time as it is treated as your debt obligation as well.

This will be a good time to make sure your child is aware of how his own actions will directly affect your credit score as well.

Remember, the best way to keep track of all your credit facilities and the repayment record of the loans you are directly or indirectly responsible for is to check your credit score.

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