Cracking the credit code: Tips for building a strong credit score

• A good credit score broadens your loan options, gets you better terms such as faster credit approval, better interest rates and higher loan amounts.

KUALA LUMPUR (Aug 17): Buying a residential property? Before you head to the bank for a loan, take a look at your credit score because it can significantly impact the lending rate you'll be offered. Your credit score tells your financial story, and lenders generally rely on it to assess your creditworthiness. It helps them decide if you are a risk worth taking – if you will be a responsible and reliable borrower and likely to repay the debt. Generally, the higher your credit score, the more favourable you look to them as this means you are low-risk.

A good credit score also broadens your loan options, gets you better terms such as faster credit approval, better interest rates and higher loan amounts. Conversely, a poor credit score can challenge your ability to secure a loan, or you may get the offer, but with a higher interest rate or a lower loan amount.

To attain stellar credit scores, Experian Information Services Malaysia chief executive officer Dawn Lai recommends the following steps:

1. Make credit payments on time and regularly.

2. Avoid applying for credit in the six months before your mortgage application.

3. Stay within your credit limits – if possible, keep balances at 30% or less of your limit.

4. Check your personal credit report regularly to make sure the information on it is accurate and up to date.

“If you find anything on your credit report that needs correcting, for example a missing credit facility or payment, promptly contact the lender to request an amendment,” Lai counsels.

Alternatively, Lai says Experian also provides services to contact the lender on your behalf to sort out such issues.

She stresses that prompt repayments to all your credits and bills are crucial, especially over the 12-month period prior to your loan application. In Malaysia, Bank Negara Malaysia’s CCRIS reports also retain payment history for up to 12 months.

In the case of utility bills, though timely payments do not directly contribute to your credit score, ballooning outstanding bills may lead the service providers to pursue payments through collection agencies, which will likely forward the records to credit reporting agencies, and this will affect your credit score negatively. 

Good credit mix boosts credit scores

To strengthen credit scores, Lai advocates credit diversity or credit mix – a combination of different credit products that demonstrate a reliable credit record and commitment to responsibly manage different types of accounts. This will help optimise credit scores and improve chances of securing loans. A good credit mix, according to Lai, consists of a mix of revolving credits like credit cards and instalment credits such as mortgages and auto loans.

“However, don’t open unnecessary credit accounts solely for this. Keeping healthy repayment history on existing accounts and a reasonable debt-to-credit ratio remain the most influencing factors when lenders are assessing your loan applications,” she cautions.

Credit behaviours to avoid

It's important to note that credit health is influenced by various factors. Individual circumstances may vary, so Lai advises that you seek guidance and personalised advice from financial professionals or credit reporting agencies for a comprehensive understanding of your specific situation if you are trying to fix your credit score.

However, here are the general causes of bad credit that you must avoid:

1. Missing payments or defaulting on accounts

Payment history accounts for up to 40%-45% of your credit score in Malaysia. Even one missed payment can have a negative impact on your credit score. Bankruptcy, foreclosure, repossession, charge-offs or settled accounts can also impact your credit scores for years.  

2. Applying for a lot of credit in a short time

Frequently opening new credit accounts can temporarily lower your credit score, and if done too often, your credit score won't have sufficient time to recover as it may indicate a higher level of credit-seeking behaviour or financial instability.

3. Using too much available credit

Avoid maxing out your credit card or utilising your entire overdraft, as it can signal to lenders that you rely heavily on credit or are experiencing financial difficulties.

Credit score myths

Lai warns that there are many common myths and mistakes consumers make in relation to their financial and credit health. Here are some that are more related to securing a mortgage: 

1. One co-borrower’s excellent score offsets the other one’s weaker score for joint loan application  

In cases where one person could not qualify alone and need joint accounts for a mortgage loan, the credit reports and scores for both co-borrowers are taken into account. While there is no such thing as a credit score for couples, one spouse or family member's poor credit history could affect the ability to secure loans. They might be faced with higher interest rates or fees, or their application can be denied altogether.

2. The credit bureaus report people as having either good or bad credit

Credit reporting companies do not make judgments about the information in credit reports. They simply compile information that is provided directly and voluntarily by consumer lenders. Lenders use this information to help them assess the risk of lending to the individual.

3. Moving credit card balances around will help hide any debt

It's impossible to hide credit card debt. If someone has 10 credit cards each with RM1,000 balance or five credit cards each with RM2,000 balance, it is still RM10,000 in debt.

4. Once a credit score is bad, it can never be rebuilt

Credit scores can change. In reality, a credit report is a history of your credit, and you can rebuild your credit over time. Even if negative information, like missed or late payments, stay on your CCRIS report for up to 12 months, you can still improve your credit by making on-time payments, exploring better credit options, and learning about money and credit management.

5. Paying cash for everything can help your credit score

If you don't have a credit history, you may not even get a credit score. Some lenders do not lend when you do not have any credit history due to lack of information on your creditworthiness. Start with small credits such as applying for a credit card that suits your spending habits and lifestyle and ensure you settle your credit card payments on time.

Improving credit scores

Improving your credit scores is not a complex process, but requires responsibility in prudent financial management.

Experian Malaysia's recent study on individuals aged 22 and above shows a rise in average credit scores. With a rating between 300 (poor) to 850 (excellent), the average i-SCORE for this age bracket rose from 606 in 2019 to 622 in 2023. Additionally, data indicates a shift towards higher credit grades, notably a 10% rise on “Good” credit risk grades, from 47% in 2019 to 57% in 2023. For those aged 51 and above, "Strong" risk grades increased from 24% in 2019 to 29% in 2023.

Other influencing factors

Lai reminds borrowers that a credit score is not the only determinant when it comes to securing a mortgage. Lenders will also consider factors like your monthly income, debt service ratio, public record data, information provided in your application form, as well as information they have on you if you are an existing customer. Additionally, lenders also have their own lending policies which may differ from one lender to the next. 

How to check your credit score

You can get your credit score report online for a fee. Better still, you can claim a FREE personal credit report worth RM19.50 when you become a verified member of EdgeProp START.

Signing up on EdgeProp START also gives you added benefits when you buy any home – both from the primary and secondary markets. You will enjoy rewards worth up to RM3,888 and also stand a chance to win a set of JBL Bar 1300 speakers worth RM7,999. Take the chance now before the campaign ends on Dec 31.