Cracking the Code: What You Need to Know About Credit Scores in Malaysia
Before applying for a business loan, it’s a good idea to check your credit score. Your credit score is a key factor that banks and lenders use to decide if they’ll approve your loan – and what kind of deal you’ll get. It shows how trustworthy you are when it comes to borrowing money and paying it back.
If you have a high credit score, it means you’re seen as a low-risk borrower. This usually means you’ll get better loan terms, such as lower interest rates, faster approval, and a higher loan amount. But if your credit score is low, you might find it harder to get a loan, or you may be offered a loan with higher interest rates or a smaller amount.
So, keeping your credit score in good shape can help you get the financing your business needs on the best possible terms.
What Factors Influence Your Credit Rating?
Payment history
Your payment history reflects how consistently you’ve been repaying debts such as credit cards, loans, and mortgages. While a single missed payment may not have a huge impact, consistently missing payments can significantly damage your credit score.
Failing to make timely loan payments can have serious financial repercussions. For example, defaulting on a loan may lead to bankruptcy, which is one of the most damaging events for your credit. While bankruptcy cases in Malaysia (Figure 1) have significantly decreased in recent years due to improved financial literacy and greater caution, it still remains a reality for some. Therefore, it’s always advisable to stay vigilant and cautious when managing your finances.
Figure 1: Registered Bankruptcy Cases in Malaysia
High Debt-Service Ratio (DSR)
The Debt-Service Ratio (DSR) measures the amount of debt you have compared to your income. It essentially compares your monthly debt commitments, such as loans and credit card payments, to your salary.
A high Debt Service Ratio (DSR) means you’re using a large portion of your income to pay off existing debts, which could indicate you’re stretching your finances too thin. Essentially, it shows how much of your monthly income goes toward covering loans, credit cards, and other debt repayments. In Malaysia, the ideal DSR is generally below 60%. This means that no more than 60% of your monthly income should be used to pay off debt. If your DSR is higher than this, it signals that you may have too many financial obligations, which could make you a riskier borrower in the eyes of the financial institute.
For example, if you earn RM5,000 a month and your DSR is 60%, you would be using RM3,000 to pay off your loans and debts. If your DSR exceeds this, say 70% or 80%, it would mean you’re using RM3,500 or RM4,000 of your income on debt, which could make it harder for you to manage day-to-day expenses and future financial needs.
Lack of Credit History
A limited or nonexistent credit history can make it difficult for lenders to assess your financial behavior. An empty credit history usually means you haven’t taken out loans or used a credit card, leaving little information for banks to evaluate.
This is common among younger individuals who haven’t had the opportunity to build credit, but it can also affect older people who avoid financial institutions for personal reasons. A joint report by CTOS and Monash University School of Business revealed that 28.3% of Malaysian credit consumers have poor credit scores, falling below the “Fair” rating, which means they are ineligible for credit facilities from banks. As a result, these individuals may be forced to seek loans from illegal lenders, who often charge extremely high-interest rates.
New Credit Accounts
Opening multiple new credit accounts within a short period can harm your credit score, as it may signal that you’re accumulating debt too quickly. Lenders may view this as a sign of financial instability or an increased risk of default. Opening too many accounts in a short timeframe can have a long-term negative impact, as it suggests a higher likelihood of financial strain.
Where Can I Check My Credit Score?
In Malaysia, you can check your credit report through three Credit Reporting Agencies (CRAs), which are regulated under the Credit Reporting Agencies Act 2010 and registered with the Registrar’s Office of Credit Reporting Agencies.
You can access your credit report through the following CRAs in Malaysia:
The Bottom Line
Understanding and managing your credit score is crucial for the financial health of your business. A strong credit score not only enhances your chances of securing loans with favorable terms, but it also helps you access better interest rates, higher loan amounts, and faster approval. On the other hand, a poor credit score can limit your financing options, increase borrowing costs, and even hinder your business growth.
By maintaining a good credit history, managing your debt wisely, and monitoring your credit score regularly, you can improve your chances of obtaining the funding you need to grow your SME. Remember, a healthy credit score is a valuable asset for your business’s future success.
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*This article is not meant to recommend CapBay products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.
