Enhancing Your Credit Score

Now you know where your credit score comes from, it will be easier for you to maintain a good score by following the rules to enhance your scoring:-

1. Check your credit score annually

Check out your credit score even if you are not looking at getting a loan. Not understanding and not knowing your credit score may be detrimental to your financial health. If you have not checked out your credit report, you many be surprised to find errors in them.

2. Avoid maxing out on all credit cards

Avoid having a string of credit card accounts and maxing out on every one of them. This may be construed as poor money management.

3. Avoid applying for new credit cards at one time

Do not apply for a lot of credit cards in a short span of time. This might give you a bad report of having financial problems.

4. Do not resolve to be a "cash" person

Cash expenses do not contribute to your credit score as they do not have any historical data. Credit cards may be bad for compulsive spenders but maintaining at least one card might help with your credit score. Make sure you maintain the card carefully. Instead of only using cash, you can still use this particular card for necessary expenses like petrol, groceries shopping etc.

5. Settle all credit accounts regularly

If you have a few credit accounts, ensure that you settled all accounts regularly. Do not just pay off one account at a time.

6. Do not cancel all your credit cards

People with bad experience with credit cards might want to pay off all their debts and cancel all the cards, however, this is a bad idea because you will be destroying your credit history by doing that. Exercise self-control on your spending and maintain some of the longer used cards to keep your credit history intact.

Good credit rule is to put your personal expense budget in order and ensure that you pay your bills and your credit accounts (credit cards, loans, mortgages) on time. Self-control is the golden rule to maintaining a good credit history.

What is Credit Scoring?

“Credit Scoring” is your personal financial background computed by each country’s credit score organisations: some government link, some private to identify the level of your credit risk based on the following categories:

1. Payment History (35%)

The lender will usually look at whether you have paid your credit accounts on time, based on….

• Payment information on all types of accounts (personal loans, mortgages, credit cards etc.)
• Public records and collections items (events of bankruptcy, suits, repossession etc)
• Details of late or missed payments based on recency and frequency
• Number of accounts that showed late payment

2. Amount Owed (30%)

Owing money in a few credit accounts does not give you a negative score, however owing too much money to too many credit accounts may label you as overextended causing late or missed payment. Consideration will be taken on

• Amount owed on different accounts
• Balance in certain accounts (credit cards showing a low balance is a plus)
• Number of accounts with balances (too many may be viewed as over extension)
• Total credit line given by all “revolving” credits and the maxing out of such accounts
• The amount owed in loan account compared to the original amount borrowed

3. Length of Credit History (15%)

Longer credit history is a plus point but if you have a short history with good payment record is good as well. Factors taken into consideration are:

• The length of all your credit accounts (age factor is considered)
• The length of specific credit accounts
• How long you have been using these credit accounts

4. New Credit (10%)

Opening up several credit accounts in a short span of time is considered greater risk especially if you do not have a long term credit history. Factors considered are:

• How long since you opened a new account
• How many new accounts you have
• How many recent requests you put in for credit cards

5. Type of Credit (10%)

Your credit mix will be taken into consideration if there is little information on your credit report:

• Mix of credit types i.e credit cards, loans, mortgage loans etc
• Total number of accounts you have
• Total number of accounts you have but not in use

If you have made a few mistakes or have been making late payment, it is not going to give you a totally bad rating. Other positive factors listed above may neutralise the effect

This is How They Score You Up

The health of your credit becomes a very important factor in your personal finances. Bad debts, late payment, non payment of monthly instalment etc. comes into play as far as your credit score is concerned.

The general guidelines about how your credit score is compiled are broken down into five main categories, with the following percentage weight for each:

• 35% payment history (only for payments later than 30 days)
• 30% debt-to-credit ratio
• 15% length of credit history
• 10% new credit
• 10% type of credit in use

A credit rating will then be assigned on the data collated:

• Rating A - applicant automatic qualify for loan applied
• Rating B - loan can be considered
• Rating C - application will be rejected but borrower can appeal to bank
• Rating D - loan will be rejected and is final

If applicants don’t qualify instantly, chances are a higher interest rate would be imposed on them, or less credit will be offered with a shorter repayment period.

Your Credit Score

In America, the use of credit scores is not only concentrating on financing, it is now expanding to other industries like insurance etc. In Malaysia and other developing countries, credit scores are still a mystery among lay people. Do you know how your application for housing or car loan is being processed? Did you ever wonder why some banks or finance institution refuse you or offer you a lesser deal than the next customer? It all has to do with your credit score.

Credit Agencies collate information on individual credit history and compile them according to their own way of calculation to determine your credit score. This information is then made available to all finance institution to check when a customer request for a loan. Most bankers have online facilities with these credit agencies. The interest rate to impose and the overall limit you will be entitled will very much depend on your personal credit history.

The first thing you need to understand is how your credit score is determined. In America, general information is available from Fair Isaac, although the exact algorithm used to determine your credit score is a secret closely guarded by each credit agency. In fact you can go online to check your own credit score to assess the accuracy of the information about your personal credit history.

In Malaysia, every applications for loan would now be subjected to a financial rating system based on Bank Negara’s Central Credit Reference Information System (CCRIS) and two other private credit reference agencies – Credit Tip Off Service Sdn Bhd (CTOS) and Financial Information System (FIS) Sdn Bhd.

CTOS and FIS provide details of the individual’s credit standing with other banks, while CCRIS tracks the person’s spending patterns and habits, repayment patterns, credit card and other electronic transaction records in the last 10 to 20 years.

It sounds spooky isn’t it?? If you are first time reading about this, it is, but if you think about it, there is a need for such control otherwise as a business person you will not know if you are doing business with a con business or a genuine one.

Stay Out of Debt!!! -- Assert Your Self-Discipline!

While you are getting out of debt, you should stay out of further debt. It is very important that you must exercise your self-discipline. If you were in debt before and if you are still in debt, it does show that you have very weak discipline……discipline in managing your money.

Staying out of debt does not mean that you severed yourself from all credits; that includes stop using credit cards totally. You have to cut up your credit cards if you are a compulsive credit card user but you will have to eventually learn to control its use. You see, if you don’t they will control you. You do not want to let that happen and ruin your life.

The usage of your credit card contributes to your credit score whether positively or negatively. Positively, is the usage while negatively, is how you pay back the money you spent. If you regularly service the interest and pay on time with at least the minimum pay back amount, then this is a plus point for your credit score.

On the other hand, not being able to settle your card fully every month will not be good for your personal finance management as “interest charged” on the unpaid portion is “money spent”. Above that, the interest charged by credit card companies are very high (18% per annum = 1.5% per month). These charges will eat into your personal wealth.

Parkinson’s Law

Yes, I know. This post sounds familiar but human being has the tendency to use their "short term" memory all the time so this will serve as a reminder for those who loves to buy. Every penny saved is every penny earned and even more.....

It is never too late to save no matter how old you are now. If you are in your 20’s you have time on your side but if you are in your 40’s, by now you would have a bigger earning power than someone who has just started. If you heed Warren Buffet’s advice to not purchase brand you will probably have more to put aside than those who are younger.

Developing the lifelong habit of saving and investing your money is not easy. It requires tremendous determination, willpower and self-discipline.

Practice frugality, frugality, frugality in all things. Be very careful with every cent

Question every expenditure. Delay or defer every important buying decision for at least a week, if not a month. The longer you put off making a buying decision, the better your decision will be and the better price you will get at that time.

I like this statement about questioning every expenditure, thank you Brian Tracy! It works for me. If it works for me, it can work for you too. You will be surprise how many things you don’t really need to buy. Majority of people, includes you and I, BUY ON IMPULSE.

A major reason that people retire poor is because of impulse buying. They see something they like and they buy it with very little thought. They become victims of what is called “Parkinson’s Law”, which says that “expenses rise to meet income”. This means that no matter how much you earn, you tend to spend that much and a little bit more besides. You never get ahead and you never get out of debt.

There you are……….resolve NOT to be a victim of “Parkinson’s Law”…….resolve to retire rich….

Get Out of Debt!

Are your still struggling with that – getting out of debt?

If you are in your 20s and if you have been following this blog and reading about how to invest, put your money into earning more money and you will probably get very fired up. Yes, I can relate to that because I was just like you but unfortunately for me, when I was in my 20s, there is nowhere I could turn to, to learn about investing and getting rich. I have got to put a lot of trials and errors into play. However, I can tell you this – living a debt-free life is bliss, its richness in itself. Yes again, you don’t have to be filthily rich to retire rich. All you need to have is enough, depending on individual needs, to live a carefree lifestyle. That is richness in itself!!

So before you can really start to invest you have to “Get out of Debt” first. I can bet that everyone working on this earth, whether young or old, has some kind of debts in their hands. Most debts are mortgages and personal loans. Majority will be credit card debts.

Lets aim for “zero” debt level. “Zero Debt” should be your ultimate goal. It is not easy but it is achievable. Time is the essence; however, the faster you get out, the lesser you spend (unnecessary) and the quicker you start to earn.

You are probably frustrated with your financial situation, why is there never enough. The big mistake is that you are spending more than you earn. That is where your debt originated. Let’s get real. It’s time to take stock of your expenses. Re-look into what is necessity, what is dire need, what is want, what is want but not real need and above all what is extravagance.

If you have spent more than you should and you have credit card debts, remember that this is eating into more debts. Until and unless you clear that you will never be debt-free or can I say F R E E…….

Decide to stop using your numerous credit cards NOW…. THIS MINUTE. Cut them up….list all the outstanding amount of each card and make a plan to clear the owing by dividing the amount you can afford monthly/fortnightly to repay your debts. Here you will now know the duration it will take you to finalise your card debts. Once you are done with the debts, the amount you put aside to repay your debts should now go into some kind of investment, whatever you are comfortable with.

Life is not a bed of roses........

Value Averaging

Similar to “Dollar Cost Averaging”, “Value Averaging” is also investing on a regular basis; weekly or monthly. The only difference is you do not invest the same amount monthly. “Value Averaging” means you are value investing. You invest more money when the market is down; the fund price is down, and you invest less money when the price goes up.

Of course, all investors hope the fund you have invested in will continue to rise, but there will almost always be highs and lows (peaks and valleys). You have just to hang on for long term. Meanwhile, you are taking advantage of the “lows”, using these pockets of dip as a great opportunity to pick up more shares according to your affordability level.

This different from “timing the market” as you are not speculating on how the market is going to move. You are just watching the ongoing pattern whereby you will make a buy when the fund price dips.

Psychologically, this can be a difficult investment plan to follow as when the fund price drops, it is not easy to continue putting in money, to say the least, putting in more money. It is easier to go the way of “Dollar Cost Average” style of investing. However, with highly paid smart fund managers managing your fund, and over the long term, hopefully the “lows” will be to your advantage to achieve your ultimate overall goal.