Simply, a credit score is a number representing the credit-worthiness of a person or the likelihood that person will pay his or her debts. It has shown to be very predictive of risk, made credit more widely available consumers and lowered the cost of providing credit.
Credit rating agencies such as Credit Reference Bureau (Africa) use such things as utility bills and financial expenditure to map your financial strength. They collect individual credit transactions from banks, finance companies, merchants, credit card companies, and other credit suppliers such as water companies, electricity suppliers, hire purchase companies and Sacco among others.
Credit histories present all activities concerning products or services one consumes on credit. It shows the amount of credit you owe, type of credit, repayment period and how one pays it. whether steadily, late or default.
Some people believe the use of their credit history will put them on a blacklist, denying them credit should they try to access any from banks and other institution. This may not be the case, a good credit score is a tool you can use to negotiate a lower interest rate on loans, among other advantages. Here are ways to ensure a good credit score:
Building a Credit Profile
The first step in getting a credit score is to get a credit profile, which includes personal details like names, location, contacts and others.
Then, get a credit history by authorising all your lenders to forward details of their transactions to credit reference bureau. They could include utility providers such as water service providers, electricity companies and other lenders like banks, Sacco's and others.
It's the type of loans one has at the same time. A common mistake many people make that results in low credit score is over-relying on one type of credit out of, say, four types.
The first type is instalment credit where one repays a loan regularly in parts. This is the type of credit offered by banks, Sacco's, micro-finance institutions and others. It's this type of credit that people tend to rely most on, having instalment credit to repay at the same time.
Having more than one loan of this type to repay increases chances of default, which negatively affects your credit score.
Another form is revolving credit, where one is allocated credit to a certain limit after which the amount lent is required to be paid back before another loan can be taken. This is the structure that credit cards and overdrafts have.
The other type is open account credit, like that offered by utility companies like water and electricity, where customers consume services without limit and then pay after a prescribed period, such as monthly.
The last is type is consignment credit where one acts as a guarantor on behalf on another so they can access credit. You don't take the loan directly but acting as a guarantor is taken into account should one apply for a loan.
Good Mix, Good Credit Health
A good mix is the key to a good credit score and overall good credit health. Apart from easier access to credit, better interest rate, a substitute for a physical collateral, the availability of credit history takes care of two kinds of people who disrupt a positive cash flow not only for those who transact with them but also for themselves.
One such a person is a serial defaulter. This person will borrow from several sources st the same time, paying back none and moving on to other lenders who do not have a credible source of credit history.
Had there been a source of credible information on how this person repays loans, or doesn't, lenders would have been spared the losses they incur in lending to serial defaulters.
The other is the borrower who will pay, but never on time i.e. a delayed payer. If one is relying on such a person to pay back so that they can carry out some transactions or pay back money, they will lose out.
Good and Bad Score
The worst or lowest and the best or highest scores range between 200 and 900 with 400 being the cut-off mark. A score below 400 indicates one who has defaulted on payments or about whom there's no information available. From 400 upwards up to 750 indicates one who pays on time with scores above that being exceptionally good.
For those with bad credit history, the good news is that it can be repaired so they can enjoy the benefits of a good credit rating. The simple way of doing this is by getting on track with any defaulted payments, which are picked by the bureau as they are made.
Remember, items that you have defaulted on appears on your credit profile for seven years as a legal requirement.