Most of you would have heard of the term “credit score”, but how many of you know what it actually is? For most, it might be common knowledge that a high credit score is important if you want to buy a car or house. So, what is it, and what is it used for?

A credit score represents your creditworthiness. In other words, it represents how likely it is for you to pay a loan back on time. Lenders such as banks use this to determine whether or not to grant you a loan, as well as the interest rate associated with said loan.

In an effort to build her credit score, Colette signed up for a credit card, with the goal of maintaining her spending habits and paying her credit card bills on time. “Sounds simple enough, right?” she told MyPF. “How wrong I was.”

Last year, after a few months of using her card, she decided to check her credit score. She obtained a report from CTOS and learnt her score was “very good” – 728.

This year, she wanted to see if her score had improved, so she checked it again. To her surprise, it had dropped to 701.

Colette was initially confused. She hadn’t accumulated any debt, she spent within her limit, and she always paid on time – so why did her score deteriorate?

She subsequently did further research and discovered it goes beyond simply making timely payments. According to CTOS, these five factors affect your credit score:

1. Payment history (45%)

The timeliness of your payments, including when your late payments were made. It is best if you settle your loan repayments and credit card bills on time each month – the later you pay, the more your score will be penalised.

2. Amounts owed (20%)

This refers to your credit utilisation, or how much of your credit limit has been used. This is what lowered Colette’s credit score, as she had been using her card to top up her e-wallets to collect points.

Even though she paid it off on time each month, using a higher amount of her credit limit affects one’s score. The general rule is to keep your utilisation to below 30%.

3. Credit mix (14%)

A mix of fixed (mortgages, student debt, car loans, etc.) and revolving debt (credit cards) is preferred to prove you can manage your debt effectively. That said, don’t take out a loan just to increase your credit mix!

4. New credit (14%)

The number of lines of credit you have taken out, generally within the last 12 months. People tend to apply for multiple lines of credit when they have cash flow issues, and the more you borrow, the higher credit risk you are to financial institutions.

5. Credit history (7%)

This refers to the duration of your credit – the longer, the better. If you cancel your older credit cards, you will wipe away some of your credit history.

Why you should get a credit report

Colette had applied for two new credit cards within 12 months, and her average credit utilisation was 32%. She wasn’t overspending but was using her cards to leverage on cashback opportunities, figuring it wouldn’t cause her any harm as long as she paid it back on time.

She has since applied for an increase of her credit limit, and has been repaying some of the e-wallet top-ups before each statement date.

Colette has also learnt that getting a credit report yearly is key to monitoring your financial health. This is especially true, she says, for those who have PTPTN loans, as many of her friends were not aware of when repayments started.

You will also be able to know how many lines of credit have been taken out in your name recently, which in turn allows you to detect instances of fraud and identity theft early.

And, as in Colette’s case, you will be able to find out if you have been making money mistakes without realising it.

“Getting my credit report has been an eye-opening experience, and I urge you to get yours as well,” she concludes, adding that there are four sources from where you can obtain this: CTOS, CCRIS, RAMCI, and Credit Bureau Malaysia.

“With your credit report and credit score, you can have a better idea of your financial situation and make necessary adjustments for a better future.”

This story was originally written by Colette @@colettesfinancejourney for MyPF. To simplify and grow your personal finances, follow MyPF on Facebook and Instagram.