Imagine this scenario: you’ve been trying to apply for loans, but have been mysteriously rejected countless times. You’re close to giving up on borrowing money from banks because you have no idea what’s going on.
There can be any number of reasons as to why a bank might decide to reject your loan application. However, one of the most common reasons is that you likely have a low credit score.
How did you get here?
There are several factors involved in your credit score. How these factors and which contribute to the actual score vary according to individual financial institutions, but we can give you a general outline of how it works.
Your payment history takes into account whether you’ve been paying off your debts like credit cards, loans, and mortgages. In this case, a single missed payment probably won’t hurt you all that much; several missed payments will almost certainly send your credit score crashing down.
How long a financial institution tracks your payment history varies and is generally kept secret. A rule of thumb is that older missed payments carry less weight than more recent ones. So don’t sweat too much over that one missed bill from three years ago.
If an account goes into default, regardless of the amount owed, there are many banks, utilities, and telecommunication companies that will make note of this and report it to credit reporting agencies such as Experian and CTOS. Things such as owing small amounts of leftover cash to telcos after service termination, unused bank accounts that cannot cover service costs, or even unpaid parking summons, can all contribute to a lower credit score. Even amounts as low as RM10 could get you in trouble.
That said, this is the most common culprit for those with low credit scores. Maybe you just aren’t earning enough to deal with all that debt, or maybe you made some really poor decisions. Either way, these issues need to be addressed in order to raise your credit score. After all, a bank views your credit score as a measurement of your trustworthiness in paying back your loans in a timely manner.
Other factors that bring down your credit score
Missed payments certainly contribute to your low score, but that is only a part of why you’re in this predicament. Here are a few other things you might be doing that may affect your credit score:
Applying for too many loans and credit cards
Generally speaking, applying for one personal loan or credit card will not hurt your credit score much. In some cases, it can even raise your score. However, applying for too many loans and credit cards over a short period of time can cause your score to plummet drastically.
This is because the banks will view you as a riskier borrower compared to someone who applies less often. Not to mention that more loans and credit cards also increase the chances of missed payments, which are a huge factor when calculating credit score.
High credit utilisation
High credit utilisation is one way to hurt your credit score. Your credit utilisation ratio is the amount of available credit you’re currently using. High credit utilisation would mean that you are close to maxing out your credit cards. This shows banks that you may be having financial difficulties and have traditionally been a reliable sign of risk.
Usually, anything beyond 70% utilisation of your combined credit limit is grounds for points to be docked from your score. To be safe, it is advisable to utilise much less credit in total. Having multiple credit cards can help to increase their combined credit limit and lower their overall total credit utilisation ratio, but as mentioned previously, applying for too many credit cards at once is detrimental to your credit score.
Lacking credit history
If you think that you can increase your credit score by not having a credit history, then think again! Having a short or non-existent credit history may actually count towards lower credit scores, as counterintuitive as that may sound. This is because having no credit history means that there is no evidence as to how trustworthy you are, thus making you look riskier to lenders. Building good credit scores doesn’t happen overnight, so having a long history allows lenders to better evaluate your trustworthiness.
By properly managing your credit and paying back all loans over time, your credit score will slowly grow over time. That means that, with age, your average credit score could go up because of a longer account history. On the other hand, lack of credit history can show banks that you lack experience as a credit user, and thus may be less reliable in repaying debts.
Taking the fall as a guarantor
Be very careful when you are standing in as a loan guarantor for a friend or family member. If they happen to end up defaulting or delaying their payment, you will be liable for debt as well. As such, your credit score is likely to suffer just as much as someone who fails to make their repayments on time. This hit to your score will also likely remain until all debts have been paid by both parties.
How do you get out of it?
We cannot presume to know your financial situation. There could be a huge number of reasons that you’re in this predicament. However, we can give you a general outline of what needs to be done. A poor rating mainly impacts your ability to take on new debt, so your priority is to start dealing with what you owe. Here are some things you can do:
Contact your bank if you’re having trouble paying off loans and credit cards. Most institutions will be happy to negotiate new terms or offer you a different repayment scheme.
You can also contact agencies like AKPK; who offer financial counselling. These agencies may even offer debt management programmes that can help you reorganise your finances and streamline your debt repayment.
Don’t miss any further payments. If you need to, setting up automatic payments for the minimum amount due can help you avoid missing a payment.
Catching up on any late or missed payments. This is one of the most efficient ways to get your credit score back on the right track. If you have any outstanding payments on your credit cards, paying them off will help you maintain a low credit utilisation ratio, making you look more appealing to lenders. It also stops further late payments from being added to your credit history as well as additional late fees.
Your credit score is updated every three to six months. If you can start raising your score to the next threshold, you can begin the next step in your financial rehabilitation.
Try debt consolidation
Now that you’ve picked yourself up and taken concrete steps to boost your credit score, your chance of being approved for a loan has improved. Which is why you need to start thinking about consolidating some of that debt. It’ll reduce your monthly payments and give you more funds each month to deal with those debts that you cannot consolidate.
If you are not sure how to approach debt consolidation, here is a quick guide to how it works in Malaysia.
Debt consolidation doesn’t necessarily have to come from a personal loan. Some credit cards also offer credit transfer options.
Get started on the right path to financial stability
Getting stuck in debt may not have been completely your fault. Things like this happen. What matters now is that you take steps to get out of this pit.
Your credit score is not your be all and end all, but it is a pretty accurate reflection of your financial health. Raising your score helps more than you think when it comes to everyday life. Especially when you have the comfort in knowing that you can get a bank loan or new credit card if you really need it.