Malaysia Consumer Sentiment Study reported in 2020 that 54% of the housing loan applicants faced difficulties in securing a housing loan due to poor credit history.
This study survey a total of 1,108 respondents of which the majority of the rejected applicants are unfamiliar with housing loans and credit scoring.
In my experience as a real estate negotiator, I agree that the majority of homebuyers did not proceed with their purchases due to their poor credit history. Coupled with poor financing education and ease in credit card application, many found themselves having terrible credit scoring.
Evidently, poor credit scoring is the biggest obstacle for homebuyers when trying to secure a housing loan. Hence, we should educate ourselves on the topic of credit score and the minimum score a homebuyer needs to secure a mortgage loan.
What is a credit score?
In general, the credit score is a 3-digit numerical system that represents an individual’s creditworthiness. The credit score ranges from 300 to 850 and it takes into consideration his credit history and debt-paying habits. A higher credit score significantly improves the chance of securing a loan.
In another word, the credit score is a report that contains all your financial information such as credit card and loan application history, payment history and ability to meet payment datelines, outstanding credit card debts and existing loans.
Simply put, it is like having a report that informs the banks all about your financial information, health and habits.
Hence, having a low credit score can be the biggest hurdle that stands between you and the bank’s decision to approve the mortgage loan you applied for.
What is the minimum credit score to secure a mortgage loan?
To apply for a mortgage loan, the applicant must have a minimum credit score of 650 to be considered by the banks. However, having a higher credit score puts you in a more comfortable position to negotiate for better loan terms and interest rates that can be of significant savings in the long term.
Different banks and financial institution uses different types of credit score. However, it is generally considered healthy to have a credit score ranging between 650 to 750. Having a credit score higher than 750 is considered exceptionally good and such a profile is often coveted by banks.
If your credit score is not at least 650 and above, it is not too late to review your financial habits and improve your credit score.
What can I do to improve my credit score?
No matter if you are new in building your credit profile or if you’ve gone through the gutters with missed payments, it is possible to improve your credit scores by following these 4 simple steps,
1. Get a credit card
To build your credit score, you will first need a credit profile and this involves opening a new credit account that is tied to the credit score bureaus (CCRIS and CTOS). It is not possible to start building a good financial track record as a borrower if there is no credit account to your name.
So the first step to improving your credit score is getting yourself a secured card if you are starting out or having a really low credit score. If you are looking to improve an established good credit score, you can also opt for the rewards credit card with no annual fees.
Once you have the credit card, my recommendation is to transfer your daily regular expenses onto your credit card and ALWAYS pay off those credits at the end of the month.
This is perhaps the simplest and fastest way to build a healthy credit score over the long term without stretching your budget.
2. Don’t miss any payments
The most important factor in calculating credit score involves the individual’s payment history and having a track record of on-time payments is crucial to achieving excellent credit scores. To do this, you need to make sure you don’t miss any payment by 29 days or it will hurt your credit score.
You’d be surprised that these payments are not limited to only credit card and loan payments. In reality, it extends broadly into your utility bills and student loans as well.
If you have a fixed payment every month (phone and internet plans), setting up automatic payments can help you avoid missing a payment. Otherwise, you can also set up monthly reminders to make payments and sort out your monthly financial affairs.
3. Work on your past debts
Late payments can remain on your credit report for up to seven years and it adds to your credit history as additional late penalties. Hence, it is good to pay off any past debts to improve your credit score.
If you are having trouble with credit card debt, it is a good option to talk to a credit counsellor and work on a debt management plan.
Personally, I prefer the debt snowball method on tackling past dues. It involves listing your debt in the order of smallest to largest and you make minimum payments on all your debts except the smallest.
Once you knock off the smallest debt and tackle the next smallest debt, you create a mental and financial momentum in tackling the remaining debts you have on the list.
4. Do not max out your credit card limit
Maxing out your credit card significantly increases your credit utilization ratio which can be bad for your credit scores. This is because credit utilization is another big factor considered in credit score calculation and it indicates to the financial lenders your credit risk.
Simply put, a maxed-out credit card can bring serious consequences to your credit score if you do not work towards paying off the credit card debt. At the same time, hitting your credit card’s limit may cause your minimum payments to increase and your future transactions to be declined.
My recommendation and many other financial experts recommend keeping your credit utilization below 30% if you wish to maintain a healthy credit score.
If you wish to understand the principle behind the 30% credit utilization, check out this article!
Besides that, you might want to also check for fraudulent activity under your name. Checking with CCRIS or CTOS report regularly can keep you updated and informed of any unauthorised activity made under your name.
What are the benefits of having a healthy credit score?
Not many of you may realise this, but having a healthy credit score has benefits far beyond getting your mortgage loan application approved. Here’s a closer look at some of the key benefits of having a healthy credit score.
1. Higher mortgage loan approval chances
Having a healthy credit score represents an individual who is responsible and diligent about paying bills on time. This helps to lower the individual’s risk profile as a borrower and makes it more likely for banks and financial lenders to approve your mortgage loan applications.
In contrast, having a bad credit score indicates poor payment history and in the sight of banks, it makes doing business with you a risk high transaction.
Remember, the higher your credit score, the more likely it is for banks to want to do business with you – applications for a mortgage loan or other credit applications.
2. Faster mortgage loan approval
If you’ve read my previous guide on applying for a mortgage loan in Malaysia, then you know that it takes time for any mortgage loan application to be approved or rejected.
A typical mortgage loan application can take anywhere between 4 days up to 14 days before any response is given by the bank indicating an approval, rejection or further consideration. If further documentation is required, the application process may extend another week or so.
On top of that, having a high credit score can help expedite the approval process as banks tend to be lenient with low-risk applicants; the higher your credit scores are, the faster the banks will decide on your mortgage loan application.
On the flip side, if you have a poor credit score, do expect to have your mortgage application go through more scrutiny by the bank before it is approved.
3. Lower interest rates, more savings
If you are not aware, having a lower interest rate means paying less money to the bank which is important when planning out your monthly finances or calculating the actual profit from disposing of a property after 10 – 20 years.
On top of that, you might be in for a surprise to know that your credit score actually plays a role in helping banks determine your mortgage loan’s interest rate. Having a high credit score helps banks identify your financial profile as low-risk, snagging yourself a good deal with the low-interest rates.
It is also worth noting that banks in Malaysia are now looking into devising tiered interest rates based on credit scores. So, if you have poor credit scoring, it might be high time for you to start improving your credit score so you can enjoy the benefits of having lower interest mortgage loans.
4. Better negotiating power
As much as you need the mortgage loan, the bank is also in need of new customers to offer their mortgage loans. This is more so if the mortgage loan applicant is of high credit scoring as they have a good track record of paying monthly instalments in a timely and consistent manner.
So if you have a high credit score, do not be shy to negotiate the terms and conditions with the mortgage banker when applying for a new mortgage loan. In some cases, you might be able to reduce the annual.
Final Words
In summary, having a healthy credit score is crucial for homebuyers as it improves your chance to securing a housing loan. As a start, you want to have a score of at least 650 or more to qualify for a loan.
If your credit score is poor now, it is not impossible to fix it and I do encourage you to plan out your journey and have the patience to see it through.
I hope the information shared through my writing has been helpful in your journey, understanding the little nuances of the real estate industry.
Until the next article, take care and stay safe!
