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Paying off debt: what factors affect your credit score?

Image Credits: UnsplashImage Credits: Unsplash
  • Credit scores are influenced by multiple factors beyond just timely payments, including credit utilization, credit mix, and new credit applications.
  • Regular monitoring of credit reports is crucial for maintaining financial health and detecting potential errors or fraud.
  • Understanding the nuances of credit scoring can help individuals make informed decisions to improve their creditworthiness over time.

The majority of you are probably familiar with the term "credit score," but how many of you actually understand what something like that actually means? In the event that you are interested in purchasing a home or automobile, it is likely that you are aware of the significance of maintaining a high credit score. So, what exactly is it, and what is the purpose of using it?

While credit scores may seem like abstract numbers, they play a crucial role in our financial lives. These three-digit figures, typically ranging from 300 to 850, are essentially a financial report card that lenders use to evaluate your creditworthiness. Your credit score can impact not only your ability to secure loans but also the terms and interest rates you're offered. In today's interconnected financial world, even landlords and employers may check your credit score as part of their evaluation process.

An individual's creditworthiness is represented by their credit score. To put it another way, it quantifies the likelihood that you will be able to repay a loan within the specified interval. Both the decision to issue you a loan and the interest rate that will be attached to that loan are made based on this information by financial institutions such as banks.

It's important to note that credit scores are not static; they can fluctuate based on your financial behavior. Factors such as payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries all contribute to this dynamic score. Understanding these components can empower you to make informed decisions that positively impact your creditworthiness over time.

With the intention of preserving her spending patterns and making prompt payments on her credit card bills, Colette decided to apply for a credit card in order to improve her credit score. It does not sound too complicated, does it? MyPF was informed by her there. How terribly wrong I was.

During the course of the previous year, she made the decision to check her credit score after using her card for a few months. She acquired a report from CTOS, which revealed that her score was 728, which was considered to be extremely good.

It was this year that she decided to check her score once more in order to determine whether or not it had improved. To her astonishment, it had decreased to 701 at that point.

First, Colette was perplexed by the situation. Considering that she had never racked up any debt, that she never went over her spending limit, and that she never missed a payment, can you explain why her credit score went down?

Following that, she looked into it further and found that it encompasses more than just completing bills on time. According to CTOS, your credit score is impacted depending on the following five factors:

Payment history (45%)

whether or whether your payments were made on time, including the date on which any payments that were late were made. One of the greatest ways to improve your credit score is to make sure that you pay your loan repayments and credit card bills on time every month. The longer you wait to pay, the more your credit score will suffer.

Amounts owed (20%)

This relates to the amount of your credit that has been utilized, or the percentage of your credit limit that has been used. Since Colette had been using her card to add funds to her electronic wallets in order to accumulate points, this is what caused her credit score to drop.

Even though she paid it off on time every month, her credit score was negatively impacted since she used a greater amount of her credit limit than she had available. It is recommended that you maintain a utilization rate that is lower than thirty percent.

 Credit mix (14%)

In order to demonstrate that you are capable of efficiently managing your debt, it is preferable to have a combination of fixed debt (such as mortgages, student loans, vehicle loans, and so on) and revolving debt (such as credit cards). Having said that, for the sole purpose of increasing your credit mix, you should not take out a loan!

New credit (14%)

The total number of lines of credit that you have, often within the past year, obtained for yourself. When people are having trouble with their cash flow, they frequently ask for multiple lines of credit. The more money you borrow, the greater the credit risk you pose to the financial organizations who provide your loans.

Credit history (7%)

This is a reference to the length of time that your credit has been in effect; the longer it is, the better. When you cancel your older credit cards, you will remove a portion of the information that is associated with your credit history.

It's worth noting that while these factors are generally consistent across different credit scoring models, the exact percentages may vary. For instance, the FICO score, which is widely used in the United States, weighs payment history at 35%, amounts owed at 30%, length of credit history at 15%, new credit at 10%, and credit mix at 10%. Understanding these nuances can help you tailor your credit-building strategies to your specific situation and location.

Within the span of a year, Colette had submitted applications for two new credit cards, and her mean credit use was 32 percent. Despite the fact that she was not overspending, she was making use of her credit cards in order to take advantage of cashback possibilities. She believed that this would not be detrimental to her as long as she paid it back on time.

Since then, she has submitted an application to have her credit limit increased, and she has been making payments on parts of the e-wallet top-ups prior to the date of each statement.

Colette's experience highlights a common misconception about credit scores. Many people believe that as long as they pay their bills on time, their score will automatically improve. However, as Colette discovered, other factors like credit utilization and the number of new credit applications can significantly impact your score. It's a delicate balance between maximizing credit card rewards and maintaining a healthy credit profile. This underscores the importance of understanding all aspects of credit scoring, not just payment history.

Another thing that Colette has realized is that it is essential to monitor your financial health by obtaining a credit report on an annual basis. In light of the fact that many of her acquaintances were unaware of the beginning of the repayment process, she asserts that this is particularly true for those who had PTPTN loans.

The number of lines of credit that have been opened in your name in the recent past will also be available to you, which will enable you to identify cases of fraud and identity theft at an earlier stage.

As was the case with Colette, you will also have the opportunity to discover whether or not you have been making financial errors without even being aware of you doing so.

It has been an eye-opening experience for me to receive my credit report, and I strongly encourage you to do the same. She finishes by stating that there are four places from which you may obtain this information: CTOS, CCRIS, RAMCI, and Credit Bureau Malaysia to name a few.

Through the use of your credit report and credit score, you will be able to gain a more accurate understanding of your current financial status and make the necessary adjustments to ensure a brighter future.

Colette's journey serves as a valuable lesson for all of us. It demonstrates that managing your credit score is an ongoing process that requires vigilance and understanding. By regularly monitoring your credit report, understanding the factors that influence your score, and making informed financial decisions, you can take control of your creditworthiness. Remember, a good credit score is not just a number – it's a key that can unlock better financial opportunities and provide you with greater financial flexibility in the future.


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