What Is Credit Score And How Does This Thing Work?
Have you ever wondered what banks consider when you apply for loans or a credit card? How will financial institutions know if you deserve help buying that new car? What helps banks decide if they should lend money to you?
This is where two magic words come in: credit score.
What is a credit score? Why do I need to know this?
Basically, a credit score tells banks if you’re really going to repay that loan. It evaluates your financial history so that financial institutions can decide if they want to have any kind of business with you. Just like how you need a resume when applying for a job, you also need a full financial health check-up before applying for loans.
You will also have more financing options as more banks won’t be afraid to deal with you. On top of that, they might also offer you a better repayment plan. A less than satisfactory credit score may discourage banks from giving you a loan.
You may not realise it, but your credit score is already affecting your life – especially your monetary decisions – more than you think.
We cannot stress how important it is for you to know your credit score before applying for a loan – scratch that – before applying for anything at all. Applying for a loan without knowing your credit score is almost like watching Mission Impossible without knowing who Tom Cruise is.
So how does this credit score thing work?
Credit score gives you a rating based on how many loans and credit cards you’ve taken and how consistently you have been paying them back.
Aside from giving you a score, the report also helps gives an in-depth analysis on all your debt and repayment habits. From there, you can assess your own habit of loan repayment, as well as check to see if you’ve missed any important payments that will leave a mark and affect your score. Your report will also tell you if there are any active legal claims made against you.
So if you think there’s no one watching while you miss a couple of monthly PTPTN payments and go for that weekend getaway – you’re wrong.
Your credit history is stored and tracked by a database owned by Bank Negara Malaysia known as Central Credit Reference Information System (CCRIS). From here, credit reporting agencies are allowed to access this information like RAM Credit Information Sdn Bhd (RAMCI), CTOS, and the Credit Bureau Malaysia. From this, they formulate your credit score.
What affects my credit score?
Well, a lot of things. Your student loan (PTPTN), car loan, credit cards, monthly instalments for things you bought and so on.
Credit rating agencies take many things into consideration, like an individual’s payment history, credit mix and loan amounts owed, length of credit history, new credit applications in the past 12 months, and legal track record.
To put it simply, as long as you prioritise your monthly repayment every month, you should have a higher score. That means whenever you get your salary, you immediately pay off your student loans, car loans, credit card debt, and what other things you owe the bank.
Every time the bank has to call and chase you for your monthly payment, it affects your credit standing. Every time you think missing a few payments won’t get you blacklisted, remember that it will affect your credit score and ultimately your future financial plans.
What if I just ignore it?
Well, you can’t. Like we mentioned earlier, your credit score is already affecting your life in a various ways, whether you realise it or not. Not taking care of your financial health can lead to many problems for you in the future. For example, it may get in between you and your dream home because your application for home loan may get turned down. This, in turn, might also affect your relationship with your spouse because you are trying to get a home together.
In case you have a less than satisfactory credit score, it might also affect your job prospects. In general cases, employers do not check their future employees’ credit score. But if it’s a finance related job, or if they are looking to give you financial responsibilities, your credit score will reveal your attitude towards money and affect your future employer’s decision to hire you.
The big question: So HOW do I calculate my credit score?
Each of the credit reporting agencies mentioned above can do it for you; all you need to do is pay a nominal fee. On the other hand, there is the free iMoney CreditScore which draws information from RAMCI and provides additional followup services. All you need to do is answer a few questions about yourself and your monetary matters to get started.
According to the iMoney CreditScore, your ideal score should be a minimum of 581 (out of 781). If it’s higher than that, then you will have an easier time applying for loans and credit cards and can enjoy peace of mind. If your score is lower than that, then don’t worry, there are steps you can take to improve your credit score.
Having no loans or credit cards under your name is not entirely a good thing either. It means that you currently do not have a credit history. Apply for a credit card with no annual fee in order to build some sort of credit history. That way, the banks will have some reference of your financial health and help their decision with lending you money.