Building a healthy credit score

Despite being a prevalent concept in countries like the US and UK, credit score is something Malaysians are generally not familiar with.

A credit score is a number ranging from 300-850 that reflects how creditworthy one is. A person’s credit score is derived from his or her credit history which includes the number of open accounts, total levels of debt and repayment history.

Credit scores are used by lenders for gauging the probability of a person repaying loans in a timely manner.

Most of us would only come across the scoring system when we’re about to apply for a loan. By then, it would be too late for borrowers to improve on their credit scores.

“Not a lot of people are aware that financial institutions would request for their credit history and pull in data for risk assessment when they are applying for credit products,” said iMoney Group CEO Mitul Lakhani.

With a credit card, one can build a credit score that reflects good financial health and in turn get access to mortgages and loans.

“Credit cards usually serve as the first stepping stone to loan products. Compared to other loans, they are easier to apply. Most fresh graduates are eligible to apply for a credit card once they step into the working world with consistent income and learn to build up their credit health by repaying their debt consistently.

“After demonstrating good credit behaviour for three to four years, when they’re ready to buy a car, they might find it more likely to get approvals for their auto loans with a high credit score,” explained Lakhani.

However, credit card usage comes with high interest charges, and uncontrolled credit card spending has led thousands of Malaysians into debt and even bankruptcy.

Low financial literacy is one of the main causes of debt accumulation. Credit cards can be useful for managing cash flow but consumers need to have full clarity of the repayment process.

For example, credit card holders should make sure to repay their credit card balance in full each month to avoid high interest charges.

Consumers should also avoid paying only the minimum payment, which is the least amount the credit card company wants you to pay. Every ringgit you fail to repay can cost you interest.

Lakhani advises credit card holders to assess if they’re spending more than they earn, check their credit scores regularly and be committed to pay the credit bill every month. If they are not disciplined, they can set auto debit for monthly repayments.

iMoney has a free credit score tool that also gives credit card holders tips on how they can improve their scores specific to their situation.

“Financial literacy needs to be a continuous effort and consumers need to be reminded regularly of ways to manage credit card debt. Consumers need to know what they’re using the credit card for, whether it is an emergency backup or for its convenience in a cashless society and practise discipline when using the plastic money. It is important for them to remember that it’s debt that they need to pay back at the end of the day,” said Lakhani. – May 22, 2020

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