Most Malaysians don’t care about their credit score. If you’re reading this, you’re among the minority who is proactive. Congratulations!

A good credit score is no guarantee that your new loan application will be approved. That’s because lenders also look at your debt service ratio (DSR), occupation, collateral and down payment amount.

However, a good credit score is very much required for loan approval.

Most people think that paying bills on time is all it takes to score high but according to RAMCI’s i-SCORE guideline, there are five other areas:

• Payment history.
• Legal history trace.
• Length of credit history.
• Credit limit utilisation.
• New credit application .

1. Payment history

You must ensure you pay all your bills, mortgage, hire-purchase, credit cards, PTPTN, and other loan instalments on time.

You must also ensure that your lenders report the accurate info to the Central Credit Reference Information (CCRIS), managed by the Credit Bureau of Bank Negara Malaysia.

To monitor your payment history, the most important document to refer to is your personal CCRIS report. Printing your CCRIS report is free at Bank Negara branches, or download it at https://eccris.bnm.gov.my/

Tips:

• Pay all bills and loan installments on time, before the due date.
• If you have missed payments, get current and stay current.
• Check your CCRIS report regularly (at least once a year if not more often).
• Examine the latest CCRIS report before you apply for a new loan so that you can tackle it before application.

2. Legal history trace

You should not have any record of legal history or bankruptcy, or else it will seriously affect your credit score. If there are any legal cases, resolve it first.

3. Length of credit history

Imagine two adults aged 40, Jack and Adam. Jack has a few credit cards, personal loans, car loan and housing mortgage. Adam has never had a credit card or taken a loan because he spends solely with cash.

You’ll be surprised that Jack will find it easier to get a new loan compared to Adam because Adam does not have a credit history.

When you don’t have a record of using any credit, especially when you’re older, lenders cannot assess your creditworthiness. Therefore, they will treat you as a high-risk individual.

Tips:

• Once you start working, apply for a credit card.
• If you can’t get one, get a small personal loan and pay it off in six to 12 months. Then apply for a credit card.
• Don’t be shy to utilise the bank’s various credit lines such as housing and car loans, and credit cards.

4. Credit limit utilisation

Having a higher percentage of unused credit gives you a higher score.

For example, if all your credit card limits combined is RM100,000, and your outstanding balance is RM80,000, you’ve used up 80% of your credit limit, which isn’t good.

Similarly, if you have an Overdraft (OD) facility, keep the utilisation percentage low. In other words, having a higher credit limit helps your score. That’s because you get more room to use your credit due to the higher ceiling.

Tips:

• Keep your credit utilisation below 30%.
• Call your creditors once a year to ask for a credit limit increase. They’ll usually ask for income proof.
• If you use up your credit cards limit, pay them off every month. It could hurt you if your credit score is pulled at the time you nearly max out the ceiling.
• It is better to have several credit cards even though you just frequently use only one.
• When you apply for a new loan, make sure you have a low balance on your credit cards and OD before submission. This action will reduce your DSR that will increase your chances of getting approval.

5. New credit applications

An inquiry shows up when somebody pulls your credit report. More inquiries on your credit report is not good and will lower your score.

However, it only applies to a hard inquiry by a financial institution. Your action of checking your credit report is considered a soft inquiry and doesn’t pose any harm even if you do it frequently.

Tips:

• Apply for new credit accounts only when you need them.
• If you’re applying for a mortgage from multiple banks for the same property, submit the application during the same week. It is understandable if similar inquiries pop up during a very short window of one to two weeks for the same purpose.
• If your loan application is rejected, don’t immediately apply for the next one. There must be a reason why your application is disapproved. So take the time to fix the problems, get a better credit score and try again.

General best practices

• Use each credit card at least once just to keep it active. It shows that you’re actually using it.
• Keep a small outstanding balance. It is okay if you just pay off the full amount right before the monthly due date because that will not post a zero balance on your cards. But you shouldn’t pay off the outstanding balance every single day or week. That is in fact not healthy because it will show lack of utilisation when the balance keeps showing zero.
• Having many different types of credit history helps. So best to have a home loan, a car loan, and credit cards even though you have the money to buy everything in cash.
• If you have a big sum of cash, consider becoming a premier banking or privileged banking customer. You might enjoy a better interest rate and loan package when you need one.
• A lower instalment commitment reduces your DSR. So, stretch your mortgage and car loan to the longest tenure. You can always pay it off earlier if you want. The idea is that this practice allows you to have more flexibility when applying for a new loan as you have more room for DSR calculation.
• Avoid being a guarantor.
• Avoid applying for joint-loans with your spouse or family. You will have a separate quota for DSR and first two 90% loan-to-value residential property financing.

This article first appeared in kclau.com

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.