Dawn Lai 
General Manager, RAM Credit Information Sdn Bhd

Question: I recently heard from a friend that applying for too many credit cards can negatively impact my credit score. Why is this so? How much of an impact does it make? What other lesser-known factors will also impact my credit score badly? How can I maintain a healthy credit score? > Delia Tan, via email

Answer: Applying for several credit cards when you have a good credit history will not negatively impact your credit score. It is your ability to service loans, which is reflected by your credit history, that affects your credit score.

So, what factors are included in a credit score? The Experian-RAMCI i-Score — with dynamic input from Bank Negara Malaysia’s CCRIS (banking payment information) plus other credit information compiled by RAM Credit Information Sdn Bhd (RAMCI) — is a three-digit score based on five components: payment history, credit limit utilisation, legal history traces, length of time credit has been in use and pursuit of new credit. 

Your previous payment behaviour has the highest impact on your credit score. If you pay your bills in a timely manner — this includes credit card bills, housing loan and car loan — it indicates that you are a responsible person in terms of credit and have prudent financial habits. A person’s public record of legal suits would naturally have an impact on a credit score.

Apart from credit performance, your credit score also takes into account your current level of indebtedness. For example, both Sally and Tom pay their bills on time, but Sally always fully utilises the credit limit granted to her on her credit cards while Tom has credit limit utilisation of less than 50% for most of his credit cards. In this scenario, Tom’s credit score is likely to be higher than Sally’s as there is a higher possibility of Sally not being able to pay her bill should any untoward circumstances affect her personal finances. 

Some lesser known factors include:

• Length of credit history. Those with a long history of credit accounts that show credit has been responsibly serviced for an extended period will have a more positive credit score. 

• Application for several credit cards within a short period of time. To the financial institution, this factor represents a great risk as it may be a sign of overspending or one’s inability to service his credit. So, the danger of applying for several credit cards is that it could potentially lower your credit score even if it is not as significant a factor as others. 

It is crucial to maintain a good credit score as this is a key indicator of credit risk used by lenders to determine creditworthiness. When it comes to locking in an interest rate, the higher your credit score, the better the terms of credit you are likely to receive. The simple way of maintaining a good credit score is to maintain good discipline in financial management and use credit responsibly. 

By knowing how the critical factors impact your credit score, you can inculcate habits that may potentially increase your credit score, such as paying on time, not maxing out the limit on your credit cards, applying for and opening new credit accounts only when you need them. More importantly, it is advisable that you check your personal credit report regularly for accuracy. This will help prevent identity theft, which may cause unnecessary damage to your credit files and lower your credit score.

Sho Toh Yih Jang 
Head of research, BH Global Advisers Sdn Bhd

Question: I am saddled with a hefty student loan denominated in the US dollar after graduating from a master’s programme at an American university last year. I have since returned to Malaysia to work. My loan repayment has become a lot higher due to the weak ringgit. I find myself anxious at the beginning of each month as I have to dip into my personal savings just to pay the amount. Are there any financial instruments that I can use in the short term while I wait for the ringgit to strengthen? > Indebted, via email

Answer: One of the most challenging tasks facing Malaysian investors in the current market conditions is how to invest profitably amid a plunging ringgit. Staying invested in the local equity market and unit trust funds may no longer be the best option as weakening economic growth, lower commodity prices and fund outflows, owing to rising global interest rate prospects, suggest we may continue seeing returns being eroded by faltering asset prices and imported inflation in the near term. While it is most Malaysians’ natural inclination to keep their assets at home, it has become increasingly vital for them to diversify their investments into non-ringgit-based assets, especially those who have financial obligations denominated in a strengthening foreign currency, such as the US dollar. 

Frustratingly, there have not been many retail investment products available locally to hedge against a weakening ringgit. At the very least, allocating money to global equity funds with a significant overweight in developed world stocks should offer some investment opportunities. 

Like it or not, US, European and Japanese equities are likely to remain the front runners in the next few quarters. The concern of China’s slowdown and yuan devaluation means global investors may continue to shun emerging markets in favour of developed markets, which are currently supported by economic expansion. 

Yet, diversifying into global equities may not be the best solution for someone seeking a direct currency hedging instrument as they could still move in tandem with local equities. If the investor’s pure intention is to hedge against a falling ringgit, he can opt for investment products that are uncorrelated to the overall equity market, such as the US dollar exchange-traded funds (ETFs). Some of these ETFs are designed to replicate the performance of being long the US dollar against the major currencies, such as the euro, yen, pound, Swiss franc and others. Some US dollar ETFs even include much more diversified baskets of currencies, such as those of major emerging markets, like the yuan, won and real.

While these ETFs may not be the perfect tools since the ringgit is being excluded in these currency baskets, they do offer investors a compelling hedging option. However, these instruments are not available locally and investors have to engage an offshore financial service provider to gain access to such products. 

Having said that, each of the investment products mentioned above (either global equities or ETFs) does carry volatility. Thus, investors need to take a longer-term view, preferably an investment horizon of 18 to 24 months. 

The movement of US dollar ETFs, in particular, could be extremely volatile and unpredictable at times. Investors have to be precise in the timing and able to determine their exact position on the cyclical phase when making investment decisions. Hence, it is advisable for investors who wish to hedge currency risk to seek professional advice from investment advisers who understand global macro investing well. 

With the US dollar set to strengthen across the board and risk further eating into our purchasing power, making radical changes to the way we used to invest is no longer an option.