There comes a time when we would want to consider applying for a personal loan. The reason could be for debt consolidation, business, travel, marriage, home renovation, etc. That’s where Islamic finance comes into the picture. It has several advantages over conventional financing such as:
- Fairness and protection from high risks
- Safe from crisis
- Fixed and clear fees
- Lower penalties
- Takaful coverage
Unfortunately, though, not all loan applications are approved. There are several reasons for this such as a high Debt Service Ratio (DSR), incomplete documents, and insufficient working period. Another popular cause is a low credit score.
But what exactly is a credit score, how do you calculate it, and what actions can you take to improve it? If you are unsure of the answers to all this, then this is the article for you!
Credit Score Basics
A credit score is a value to represent your creditworthiness. It relates to how likely you are to repay debt. Financial institutions such as banks and lenders use your credit score to evaluate your application for credit or loans. It can also be used to determine the interest rate for your loan.
In Malaysia, these financial institutions may use their own internal methods of evaluating your credit score. However, to assist them in this evaluation, many will refer to two popular credit reports. They are the Central Credit Reference Information System (CCRIS) and CTOS
Central Credit Reference Information System (CCRIS)
CCRIS is managed by the Credit Bureau of Bank Negara Malaysia. It gathers credit information from multiple financial service providers in Malaysia. These include banks, insurance brokers, and even private companies providing utility services such as the Malaysian telecommunication companies.
A CCRIS credit report will provide information such as outstanding loans, summons, or whether the person has been declared bankrupt.
CTOS is a private company which provides credit reporting. A CTOS score is calculated based on credit information from both CCRIS and CTOS’s personal database. Information from the latter is gathered from various public sources such as the National Registration Department, Malaysian Insolvency Department, Companies Commission Malaysia, and publications of legal proceedings and notices.
A CTOS credit score ranges between 300 and 850. A score of 718 – 850 is considered above average, 651 – 717 is fair and anything below 650 will make it either hard or almost impossible to obtain any credit from the banks.
5 factors make up a CTOS score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
How do you improve your credit score?
Knowing your credit score is the first step towards improving it. Thereafter, you will be able to improve your chances of getting your financing application approved.
As for actions you need to take to improve your credit score, you can apply the following:
- Be a good paymaster – this means paying your bills on time. Being prompt on your payments for a month won’t improve your credit score immediately. However, keeping this habit will eventually improve your credit score in the long run.
- Avoid defaulting on your debts — Loan default is the failure to repay a loan according to the terms agreed. Try to settle or minimise your debts. One way to achieve this is through a balance transfer or taking a debt consolidation loan.
- Not cancelling credit cards – as mentioned earlier, the length of credit history is also taken into account. You may be the most financially prudent person, but you need to be able to prove that to the bank.
- Do not max out your credit limit — The debt balances that you carry on your credit cards can affect your scores almost as much as whether or not you make your payments on time.
- Stop applying for new loans if you are continually rejected – this is rather self-explanatory.
Truly halal banking
As mentioned at the beginning of the article, choosing Islamic financing provides better benefits than the conventional alternative. But with so many products on the market, choosing the right one may be difficult.Therefore, head on over to AsSidq.com to get the best Islamic financing offers in Malaysia. It is your one-stop platform for Islamic financial products. They help match you with the best shariah-compliant financial offers from their banking and financial partners, based on your requirements and needs. The service is provided free, simple to use, and you will be matched instantly. Apply now and get approved in no time!