In the previous article, we covered the basics of what credit cards are. In this article, we will cover credit scores, and by the end of the article you will know:
- What credit scores are
- How to improve credit scores
Credit scores, also known as credit ratings, are created from the financial information in your credit report, also known as the credit file. Each country has a body or institution that holds an individual’s credit report.
The information in your credit report comes from your financial activity with banks and lending facilities. Your credit report will be used by lending facilities and banks to assess your creditworthiness when you apply to be a potential credit (card), customer.
The information in the credit report helps the lending facility to know
- If they should lend you the money you apply for or not
- How much they should line of credit they should extend to you (basically how much you can borrow) if they find your creditworthiness allows
- And how much interest they should charge you for the credit money you have qualified for
Credit scores, however, are not the only factor that is considered when one is being considered for a credit card. Make no mistake though, they are a huge factor when put into consideration.
Most governments and their bodies, like the Kenyan government and the CRB, have put in place policies to protect the credit card user from exploitation from banks and thus they require the lender to have full disclosure of all the contract details and implications for when the user enters into the agreement.
For instance, the credit card user is made aware of the charges to be incurred when using the card (hence no hidden charges), the implications of late payments and interests to be accrued while using the card.
The main responsibility, however, when it comes to maintaining a good credit rating, is on the credit card. Maintaining or improving your credit score can be done in the following 7 simultaneous ways:
Pay your bills on time and other loan repayments
In countries like the US, the UK and Australia, where rent payment and mobile phone subscriptions are billed automatically unlike in most African countries, payment of such bills affects the credit score of the user. While this is yet to gain proper ground, it has already taken root in some urban areas, and the trend is set to rise.
Thus, make it a priority to be financially stable and avoid late payments on these utility payments as they eventually will reflect and affect your credit score.
If you are unable to pay your bills and sustain yourself financially and let’s assume you file for bankruptcy, that entry will stay on your credit report for seven to 10 years.
Avoid delayed payments on the card
Repay your credit card based on the monthly amounts that you agreed upon when signing the credit card contract. Delayed payments put you in the red and your credit score rating drops.
This is because delayed payments signal your lender that you are incapable of servicing your credit loan, and as such, the next lender will see you as high risk, thus you will be flagged for a low line of credit and high-interest rates.
Thus, in case of accrued credit card debt, prioritize it for repayment before using the card any more in order to improve your rating.
Kindly note that late and missed payments will stay on your credit report for up to seven years. And while most lenders check for your current credit entries and payments, the negative information still affects your score.
Frequently check your cards for fraud or identity theft
This could be done annually, or as you please. Request your credit card report, which will show you what your lenders and potential lenders see when they check your file. The importance of checking the reports is that you can notice if a lender incorrectly filed a payment as late as that can affect your credit score.
Checking also helps you notice if there is suspicious activity on your credit card that was unauthorized by you which could point to fraud or identity theft. This will also be put in your credit report for 13 months if investigated and found to be true in order to protect your score from the implications of the fraudulent activities.
As soon as you notice any inconsistencies, you can file for a dispute in order to get the matter addressed, and promptly resolved.
Check if you are linked to another person
I recently read a post about a lady who had to pay off a credit card that had been maxed out by her mother. After completing her high school, the mother opened two credit card accounts on her behalf and linked one of them to herself. When the lady left for college, she was given one of the credit cards and the mother remained with the other.
When she became financially conscious and requested for her credit report, she realized that her mum’s debt was solely hers and she had to pay it off. To avoid being in a similar or closely related scenario, frequently request for your credit report. Ensure that those you are linked to having good credit scores so that their ratings boost yours as opposed to tanking them.
Also, for spouses who practice division of home labour, there could be one who does the payments of house utilities. If the cash is actually coming from you, make sure that the payment is made in your name. Otherwise, one spouse will look like they do all the payments and thus their credit score improves while the other’s remains as is. Eventually, it looks like they have less financial activity to their name as opposed to the real scenario on the ground.
Credit utilization ratio
Lenders will check previous credit card utilization ratios to determine your creditworthiness. It is best to carry a balance ratio of 30% or less. For instance, if the credit limit is 100,000 KES, it is advisable to keep the credit balance below 30,000KES which is below 30% of the credit limit.
Avoid opening many credit card accounts open. Open only when necessary.
What happens every time you apply for a credit card is this; it gets listed on your credit card report as an enquiry. Enquiries typically stay on your report for 2 years. Thus opening too many accounts in a given period of time shows that you are a high-risk user since you are accumulating debt. This negatively affects the credit score.
However, for the accounts that are already open, closing them off does not necessarily mean that you will improve your credit score. If you are able to service them properly by keeping a good credit utilization ratio and making timely payments, their existence will improve your credit score. They will serve as evidence of your reliable credit history and help you increase your line of credit.
These are some of the major ways to improve your credit score. For further ways to do so, you can ask your lender or scour the internet for the same. In the next article, we will cover some credit cards available from Kenyan banks, and mobile banking facilities that offer services of a similar nature.
