Your credit score plays a vital role in defining the parameters of the financing products you’re eligible for – how much interest you’ll pay, the tenure of repayment, and whether you’ll get additional benefits or not.
The fact that your credit score is pretty much the backbone of your personal finances means you will have to invest that much more in making sure you have a good credit record.
The calculation of your credit score is complicated as it depends on various factors. The value is derived from the information in your credit report, which means that any change in your report will result in a change in your score.
Although it is not possible to pinpoint the exact cause, here are 10 of the most common situations that hurt your credit score.
1. You missed a payment or made a late payment
Your credit rating is a direct reflection of how you handle your loan or other lines of credit. Therefore, not making your credit card or loan payments on time will bring down your score.
Any payment made 30 days after the due date will be reported to the credit bureaus by your lender. Once this happens, your credit score will drop. It can take close to seven years for a late payment, also called delinquency, to be removed from your record.
While a single late payment may not decrease your score by much, multiple delinquencies in your report will have a significant impact.
2. You closed your credit card account
Closing a credit account, like a card or loan, can actually bring down your score.
When you repay your credit balance in full, you are reducing your credit utilisation ratio which is a measure of the percentage of the credit limit you are using.
By closing an account, you are bringing down your credit limit, and in turn, that may pull your score down.
While this holds true for revolving accounts (like credit cards), it works differently for instalment loans like personal loans.
Closing your loan account may not improve your rating, but it might not bring it down either. Holding a home, car or, personal loan with reducing balance can help your score because it adds variety to your credit profile.
3. You have a Special Attention Account to your name
Special Attention Accounts are impaired loans or any other account which is under the close supervision of financial authorities. If you have any Special Attention Accounts to your name, which will get reflected in your CCRIS Report, your credit score will get severely impacted.
4. Your credit account was sent to collections
Banks and other lenders transfer unpaid accounts to collection agents to cut their losses or recover the amount. If you haven’t been able to make your monthly payments for a long time, then your account could have been sent to third-party collection agents. As soon as a collection account is entered in your credit report, your score will suffer.
5. You made a big-ticket purchase (temporary dip)
Let’s consider that you used your credit card to buy a big-ticket appliance, like a high-end laptop, TV or refrigerator, in June 2018. Since you used a significant portion of your credit limit for this month, your credit utilisation ratio increases, bringing down your score.
You will notice a drop in your credit score even if you pay off the amount in full the very next month because of the gap between the time your bill was generated and the payment due date the following month.
But unlike delinquencies, you can recover from the effects of a big-ticket purchase quickly by paying off the amount in full (or utilising an easy payment plan) and avoiding making multiple expensive purchases within a short frame of time.
6. You declared bankruptcy
Filing for bankruptcy will result in a drop in your score but will depend on the type of bankruptcy you file.
A bankruptcy remark can stay on your report for seven to 10 years, affecting your ability to seek new lines of credit.
On the other hand, your score could dip when a bankruptcy remark falls off your report after the stipulated time, the reason for this being that credit bureaus categorise individuals with similar credit ratings into groups called scorecards to calculate their score.
Once the remark falls off your record, your profile will be moved to the next group. If any negative remark gets added to your report here, then your score will automatically drop.
7. Your report has incorrect or outdated information
Your credit score is calculated using the information given in your credit report. If any information is found to be wrong or outdated, then your rating could take a hit. Some of the common discrepancies that can impact your score include:
- Incorrect accounts linked to your name
- Personal details entered incorrectly
- Old collections accounts linked to your account
- On-time payments marked as late payments
While some could be manual errors, others could be because your lender has not updated your account information. The only way to catch these errors is to go through your report with a fine-tooth comb and challenge the discrepancies.
8. You have applied for multiple credit cards in a short period of time
When you apply for a new credit card, your bank will look into your credit report to determine your eligibility. Each enquiry into your report is counted against you and will eventually bring down your score.
If you have applied for two or more cards within a month, you will notice that your score has taken a hit.
9. You have maxed out your credit card
If you have maxed out your credit card, then you will notice that your score has taken a beating. Even if you continue to make the minimum payment each month, your rating could drop because your credit ratio has increased.
When you utilise your full credit limit or go over, your utilisation ratio goes up to 100%, drastically bringing down your score. This holds true whether you have one or multiple credit cards.
10. You pay only the minimum amount each month
If you are someone who uses their card to make day-to-day purchases, then making the minimum payment will not restore your credit limit. Continued usage of your card will result in an increased credit utilisation ratio which will lower your score.
It can be confusing to keep track of all the factors that negatively impact your score. Adopting certain best practices, like making repayments on time and keeping your credit utilisation score below 30%, can help you achieve a healthy score.
It is also advisable to go through your credit report to spot any discrepancies. You can request for a copy of your report from either of the two credit bureaus in Malaysia, CTOS or CCRIS. Remember that you can access your report for free, without impacting your score, once every 12 months.
This article first appeared in BBazaar.my
BBazaar Malaysia (BBazaar.my) is part of BankBazaar International, the world’s leading neutral online marketplace that helps people decide on financial products such as insurance, credit cards, fixed deposits, saving accounts, mutual funds and many more.