changes as the elements in a credit report
change. A credit score has broad use and
impact. Your credit past is your credit
future.
What makes up a typical
credit score?
Well this appeared in a past issue on the
ABC you should know about your personal
credit and I found it wise to repeat it here.
Using the Source as Fair Isaac and
Consumer Federation of America, 2005,
This is what makes up a typical credit score
The metrics and algorithms that go into
collating your credit score are changing
rapidly, so it is good to keep up to date
on how they are changing and what you
can do to preserve or improve your credit
score. Firstly, a few things you need to
know about how you are scored.
Credit scoring models are statistical
analysis used by credit agencies or bureaus
to evaluate your worthiness to receive
credit. The agencies select certain statistical
characteristics found in a person’s credit
payment patterns, analyze them and come
up with a credit score.
Did you know that financial companies who
are assessing you for risk may already be us-
ing these social media metrics to assess your
risk? A lot of personal information is made
freely available since most people tend to
opt in to the social media sites and leave all
their information open to the public.
Credit reference Bureaus collect your
financial and personal information and
document it on your credit report. This
information is then used to calculate
your credit score, which includes: Your
personal details such as your age, location;
The type of credit providers you have used
like bank or utility company; The amount
of credit you have borrowed; The number
of credit applications and enquiries you
have made; Any unpaid or overdue loans
or credit; and Any debt agreements or
personal insolvency agreements relating
to bankruptcy.
`
Uses of Credit Scores
Lenders such as banks and credit card
companies use credit scores to evaluate
potential risk by lending to consumers
and to mitigate losses due to bad debts.
They use credit score to determine who
qualifies for loan, at what interest rate and
at what credit limit.
Credit scores are used to determine which
customers are most likely to bring in
the most revenue. Credit scoring is not
limited to banks alone as it’s used by other
organizations such as mobile companies,
government and utility companies and
captures any unpaid or overdue loans or
credit.
Improving Your Credit
Score
Now you’ve known details entailed in
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the credit score, the question lingering in
your mind is how can you improve and
preserve your credit score, here is how to
take action to preserve and improve your
credit score: It is always advisable to start
with knowing your credit score. Download
your credit report from at least two CRBs
for comparison purposes.
The habit of habitually shopping around
for credit can actually reduce your score.
The more applications you put in for
credit cards, loans etc, the more your score
is affected. Each time you apply for any
form of credit, your prospective credit
provider is likely to make an enquiry on
your credit report.
This is called a hard enquiry, as opposed to
a soft enquiry where you request your own
credit report. Hard enquiries take a few
points off your credit rating, and lenders
tend to view them negatively because
having too many hard enquiries on your
report suggests you are desperate for
credit and not managing your resources
well. Try and be selective about who you
approach and ask for credit.
It is wise to be watchful on what you post
on social media. Companies are already
incorporating social media as part of the
overall assessment of your credit risk,
so keep this in mind next time you post
anything publicly.
Ensure you pay off your debts, rather
than moving them around and trying to
consolidate all the time. Or having a habit
of topping up all the time.
As much as possible avoid negative
accounts. Do not let your loan repayments
get behind or your accounts fall into the
negative. Each time you default on a loan
repayment or your account runs into the
negative, it is logged and noted, so do not
let it happen.
Have a habit of paying your bills on time.
Sounds simple, but any company can list
Have a habit of
paying your bills
on time. Sounds
simple, but any
company can list
a default against
you, so long as it is
a contracted debt,
so do not give them
the chance in the
first place. Set up
payment remind-
ers, to ensure you
make payments
on time.
a default against you, so long as it is a
contracted debt, so do not give them the
chance in the first place. Set up payment
reminders, to ensure you make payments
on time.
If you are in trouble, get help from a debt
counselor. It is high time you sought for
assistance to manage your debt troubles
It is worthwhile to remember that
continuously using credit facilities like
credit cards, Mshwari, Branch and any
other while ensuring you pay on time is a
way of building a good credit score
What does my Credit
Rating mean?
Depending on the credit Reference
Bureau used to calculate your score, it will
be a number 100 and 900. The number
is rated on a five-point scale which are
excellent, very good, good, average and
below average. The position of your credit
score on this scale helps lenders work out
how risky it is for them to lend to you.
Excellent means you are highly unlikely
to have any adverse events harming your
credit score in the next 12 months. Very
good implies you are unlikely to have
an adverse event in the next 12 months,
while Good means you are less likely to
experience an adverse event on your credit
report in the next year. Average implies
you are likely to experience an adverse
event in the next year whereas below
average shows you are more likely to have
an adverse event being listed on your
credit report in the next year.
You may need to check with more than one
credit score provider to get a consistent
and reliable measure of your credit rating.
From credit score you can derive the
two important ratios, namely Utilization
Ratio and Credit Inquiries this may
affect your credit score. Utilization Ratio
is the ratio of total credit card debt to
credit limit and should be no more than
30%. Closing accounts with high credit
limits will increase your utilization ratio
and decrease your credit score Example:
Kshs.30,000 of debt with a Kshs.100,000
credit limit = 30% utilization ratio.
The importance of credit score needs to
be emphasized, as your score determines
the amount of credit available from
Lenders and it serves to either improve or
affect your relationship with lenders. So
download your credit report now and start
monitoring your credit score from time to
time.
Wasilwa Miriongi is a certified
Credit Professional currently working
as the Managing Director, Del Creder
Credit Management Limited. You
can engage him on this or related
matters via email at: WMiriongi@
gmail.com.