The Perfect Credit Score before your Late 20’s

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How to get approved for your housing loan? Read on…

With the housing loan approvals slowly declining over the years, one cannot help but to really start thinking about how they’re going to be a part of the 74.6% of credit approved borrowers.
That means there’s a substantial 25.4% chance that your loan application will be rejected. And we’re here to help you hack your way through for the perfect credit ratings.

Housing loan approvals declining throughout Malaysia as stricter guidelines are enforced by Bank Negara.

The S&P Global Literacy Financial in 2014 reports that financial literacy rate in Malaysia is only at 36%, compared with 59% in developed countries. 5 years later, we hoped that things would change or be better, but results from Bank Negara shows otherwise.

Don’t worry. In this article, we’re here to help you towards getting a favourable answer from the banks.

1. Get a steady job (Stay at least for 2 years)

If you’ve recently graduated and begun work, it’s not advisable to get started on house hunting yet. Your job is probably the most important point to show consistency and confidence to the banks before they can even start lending you money. Say even if you got a pay increment, saved moderately and could afford the loan, the banks still do not have any financial footprint that is uniquely ‘you’ if you haven’t started from somewhere.

Monthly savings is not a good enough reason because the money could be easily moved elsewhere.

It’s advisable for most of the people within the range of 21-25 years old to start acquiring good credit scores.

2. Get your OWN credit card (You should if you don’t have one).

The bank values monthly commitments quite seriously. One of the easiest way to get your credit rating up is to obtain a credit card from the bank and PAY IT BACK ON TIME, CONSISTENTLY. Even if you don’t need a credit card, the banks will want to know if you’re a good paymaster. So it doesn’t matter what limit, or even if you bought an ice cream cone from McDonald’s once a month with your credit card, the banks see your monthly repayments via their CCRIS system that they have directly with Bank Negara.

3. You are discipline in paying any debts/ services you utilise.

Whether it is an education debt, your PTPTN, personal loans through institutions, or your utility bills, the consistency of paying on time for at least 12 months straight without missing on payments / late payments will give Banks the right confidence. Not only for the bank to see, but you also will build an attitude towards yourself, by being a responsible borrower.

4. Build the Perfect Credit Score. Avoid these red flags;

Miss or do late repayments (Red Flag #1)

Had your dues slipped out your mind? Unfortunately, it’s a poor excuse for the bank, and the borrower will be penalised on late payment, on every extra day the interest can reach up to 18% (per annum) on credit cards for every ringgit you owe.

Ensure that you are aware of each of your monthly commitment and have reminders on when to pay them. Otherwise, consider an auto-debit system by each respective bank.

Max out your credit card utilization (Red Flag #2)

Having your own credit card or multiple credit cards does not mean you should spend more and build up credit. If you keep credit without repaying it fully, that would add up to your credit utilisation limit. Banks typically use a method called DSR (Debt Service Ratio) to calculate an individual’s credit-ability. It’s scoring to see if you could still afford to pay off your monthly debts/usage first on top of approving you to get a new home/car loan from the banks.

So if your usage is always maxed out, it shows that you don’t have good financial planning and that you tend to spend more than you can afford. It is common that bank rejects loan submissions from profiles with a high DSR because it’s risky on their position to issue the loan as a high DSR reflects larger spending behaviour. Try to avoid taking those 0% interest-free monthly repayments for products/services, as this too directly contributes to a higher DSR. It will affect your financial planning especially if you’re thinking of getting a home.

A report from TheStar (2018) says that 47% of Malaysian youths have high credit card debts while 38% have been identified as having personal loans.

Multiple credit applications or active loan (Red Flag #3)

If you’ve been applying for credit cards or loans very recently, it’s better to give it a rest before applying for another one. Especially if the last one was rejected.
It may matter when you decide to apply, as creditors will see this as an added risk for them that will lead to default loans and will opt to stay away.

High Debt Servicing Ratio (DSR) (Red Flag #4)

This is conducted when you compare your income documents against your total outstanding credit.

Be careful when applying for more credit cards or taking up personal loans. It will add to your loan repayment every month, and banks usually will allow you to take up to 67% of credit financing from your nett paycheck (You’ll need 1/3 to yourself for monthly expenses).
If your repayments and monthly usage are already at 55-60% of your paycheck, the 10-15% balance is not going to be enough for the bank to loan you a full loan to cover a car or a house.

Here’s a case example:

Your Monthly Income: RM8,000

Monthly Rental: RM1,000

Currently has 3 credit lines: Personal Loan (RM1,000), Credit Cards (RM2,500 monthly spend), and Car Loan (RM500)

Total monthly commitment: RM4,000

Your debt service ratio would be calculated as:

RM4,000 / RM8,000 X 100% = 50%

With an income of RM8,000 monthly and a monthly commitment of RM4,000, your debt ratio is at 50%. Though your monthly rent doesn’t affect the banks, new bank regulations will look and consider external factors and expenses, thus it may be slightly challenging to apply for a loan, even with a guarantor.

In a nutshell,

Planning your finances is the key to healthy credit history. Know how much you can bite before committing, and be aware of each loan you are about to take up as it affects your first mortgage. As a young person, knowledge of finance is vital. Always be financially savvy as this will improve your living standard in the long run. The key towards a better real estate portfolio lies within better management of cash flow.

Share this article with all the young people you know.

Read also Sales and Purchase Agreement (Sub Sale) in Malaysia Guide.

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