Taking a personal loan can be a smart financial decision, but do you know how does a personal loan affect credit score in Malaysia?
Navigating your finances as an adult means having to balance your commitments and your debts, as well as maintaining a healthy credit score.
Let’s delve deeper into the impact of personal loans on credit scores and understand the broader relevance of credit scores in financial planning.
How Credit Score Affects Your Financial Health in Malaysia
Banks and lenders evaluate your trustworthiness based on your credit score and record. This affects various parts of your life, including:
- Getting a credit card.
- Buying a car or property.
- Renting an apartment.
- Opening a business.
Here are more reasons why your credit score matters:
1. Access to Credit
In Malaysia, having a high credit score offers easier access to a wide range of credit forms. This includes personal loans, credit cards, mortgages, and car loans.
Furthermore, a good credit score means that banks are more inclined to approve your loan applications.
2. Interest Rates
Your credit score is a pivotal factor when it comes to determining the interest rates offered to you on loans and credit products.
The better your score, the more favourable the terms.
In essence, a robust credit score often results in lower interest rates, which can lead to considerable savings on interest charges over the duration of the loan.
3. Credit Limit Increases
A noteworthy credit score isn’t just about getting loan approvals.
It can also pave the way for credit limit increases from credit card companies and financial institutions, offering you greater financial flexibility.
4. Financial Stability
A stable credit history and good credit score are great indicators of financial stability and reliability as a borrower.
These can also enhance your credibility in the eyes of banks, landlords, credit card companies and even potential employers.
5. Employment Opportunities
Notably, potential employers might review your credit report as part of their recruitment process. This is especially true for roles that come with financial responsibilities.
So, if you’ve managed your finances well, your pristine credit history can be an added feather in your cap to enhance your employability during job hunts.
How Does a Personal Loan Affect Your Credit Score
Personal loans can have a dual effect – positive or negative – on your credit score, contingent on how you handle the loan repayments.
1. Positive Effects
- Establishing Credit History
For those with limited or no credit history, taking out a personal loan can be a stepping stone to building a positive credit history.
By making timely repayments, you can demonstrate your ability to manage credit responsibly and set the stage for future credit applications.
- Diversification of Credit
A diverse credit portfolio is often viewed favourably by financial institutions and credit scoring models when calculating your credit score.
Hence, you can positively impact your credit score by applying for personal loans, in addition to other types of credit, such as credit cards.
- Payment History
The significance of punctual payments can’t be overstated. Sticking to the agreed-upon terms of your personal loan and making payments on time can contribute positively to your payment history.
A history of timely payments is a dominant factor in shaping your credit score.
- Improved Credit Utilisation
If used wisely, a personal loan can be a tool to consolidate high-interest debts, leading to an improved credit utilisation ratio.
A lower credit utilisation ratio can, in turn, be a boon for your credit score.
2. Negative Effects
- Increased Debt Burden
While loans can be beneficial, accumulating too much debt or taking out multiple loans simultaneously can set off alarm bells for lenders.
This may also indicate a higher risk of default and lead to a dip in your credit score.
- Credit Inquiries
It’s important to be judicious about loan applications. Every time you apply for a personal loan, banks might execute a hard inquiry on your credit report.
Multiple hard inquiries in a short span can temporarily lower your credit score.
- Late Payments or Default
The repercussions of missing payments, making late payments or defaulting on a loan can lead to a substantial decline in your credit score.
The blemishes of late payments can stay in your credit report for many years.
- High Credit Utilisation
It is counterproductive to use a personal loan to clear off credit card debts only to accumulate high credit card balances again.
This cycle can result in a persistently high credit utilisation ratio and be detrimental to your credit score.
When to Consider Taking Out a Personal Loan in Malaysia?
1. Debt Consolidation
If you’re grappling with multiple high-interest debts, a personal loan can be a lifeline, consolidating them into one manageable loan with potentially lower interest rates.
2. Home Renovation
If home improvements are on your agenda, personal loans can provide the necessary funds.
Whether it’s to spruce up your living space or to elevate your property’s market value, a personal loan can be an ally.
3. Business Startups or Investments
Aspiring entrepreneurs and investors can look towards personal loans for that much-needed capital.
Be it launching a new venture or exploring investment avenues, a personal loan can be the financial springboard you need.
Learn How Does a Personal Loan Affect Credit Score with Bluebricks
We understand the complexity of maintaining a healthy credit score and finding a suitable financial product to meet your needs.
At Bluebricks, we help individuals understand more about how does a personal loan affect credit score and guide them to make the right choices for their situations.
As a reputable bank loan and debt consolidation specialist, Bluebricks provides a comprehensive list of services, including:
- Personal loan services
- SME loan rejected services
- Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)
- Collateral loan services
Bespoke Loan Consultancy Services
Whether you are new to credit or seeking to improve your credit score, we have the experience and resources to advise you on your next course of action.
Our loan specialists will recommend the most suitable loan products based on several factors, such as:
- The specific loan amount you require.
- The urgency with which the loan amount is needed.
- Whether you or your parents own a property that has been held for over ten years.
- Your income level.
- Your CTOS score (such as your credit score and credit history).
How Does a Personal Loan Affect Credit Score – FAQs
Before you commit to a personal loan, we have compiled some informative FAQs to help you decide.
Yes, multiple loan applications can lead to several hard inquiries on your credit report, which may slightly decrease your score, especially if done in quick succession.
Timely repayments contribute positively to your payment history, one of the most significant factors in determining your credit score.
Consistent on-time payments demonstrate responsible credit behaviour to banks and lenders. Individuals with a good track record of repayments also have a lower risk of default.
Defaulting on your loan can severely reduce your credit score. The negative mark can linger on your credit report, affecting your ability to get favourable loan terms in the near future.
Hence, individuals with a low credit score should take immediate action, such as settling any overdue debt and consistently making timely repayments to improve their credit score over time.