When past credit history returns to haunt
By Peter Kamuri
When Eustace Karanja, a small scale business owner in Gikomba Market, Nairobi, applied for a loan with a micro finance institution five weeks ago, he was optimistic that finally, he would get money to revive his declining business.
Besides reviving his business, he knew he was upbeat that he would get some money to pay for his children’s school fees when the schools opened for the new term this year.
However, this was not to be.
Barely two weeks after he applied for the loan, he received a call from the bank telling him that his loan application was not successful. The reason advanced was that he had defaulted in repaying a loan he had acquired from another bank previously.
Karanja was dejected. However, after soul-searching, he indeed recalled that he had defaulted in repaying a loan he had secured from another bank previously. He had repaid the loan for only a few months before absconding.
Karanja’s past had haunted him and getting a bank loan was now a mirage. Many people have had a similar experience. Until recently, banks can now share information about your credit history which can determine whether you can get a loan or not.
Jared Kanga, a financial advisor says that the Credit Information Sharing (CIS) is a process where lenders and other credit providers make information available about their borrowers to a credit reference bureau so that it can be shared with other credit providers.
"Your credit report is important as lenders use it in order to determine whether or not to extend credit to you. It may also determine the interest rate and terms of the credit or loan that you get. The lower the rating, the less likely you will be approved for a loan," says Kanga.
He adds, "Your credit history can help lenders predict your likely behaviour after getting a loan, or an overdraft. If you have a high propensity to default repaying loans, most lenders will be cagey when it comes to approving your loan."
Lending institutions want to know something about your financial past. This helps them to get a peek of your financial future. Your lenders are also able to know whether they can do business with you depending on how you have previously managed your money.
"Indeed, lenders want to know how you have been repaying your loans and overdrafts. Have you been paying promptly?" Kanga says.
This therefore means your past can haunt you and affect your credit rating. You must strive to make your credit reporting positive. This is one way of guaranteeing that you can get a loan in future. Then how can you improve your credit rating?
"The first thing you need to do is to avoid any negative report that can lead to you being poorly rated. Do you have a loan you failed to pay and dodged your bank by opening another account? Do you have proven cases of fraud or forgeries?" Kanga advises.
"You must learn how to pay your bills in time. The main reason why your credit history can be poorly rated is if you are late in repaying your bills. Late payments will definitely be a blemish in your credit report," he advises.
He cautions, "Giving bouncing cheques can adversely affect your credit history. More so, it is a crime that can land you in jail. So do not treat it lightly, it is as serious as when you do not pay your loan in time."
"It is always a good idea to review your credit report occasionally. This is important as sometimes mistakes can happen or you may discover some fraudulent activities and the earlier you correct this, the better," advises Kanga.
Ruth Kioko, a financial advisor and a banker says "To rebuild you credit history, open a bank account with your favourite bank. Having an active bank account shows that you can manage money. Similarly, ensure that you have a good working relationship with the bank."
She adds, "To build confidence with the bank, you may ask for an overdraft. This is an authority to spend a limited amount of money above what you have at the bank. So it is more or less than a loan but gets paid back as soon as you make deposits."
"Applying for a credit card can help you establish a credit history. The card will enable you to get limited credit and if you pay back what you borrow in time, your credit history will be improved and you may be seen as a trusted for borrower," Kioko advises.
She adds: "Most of those people who have a poor credit history have a tendency to have huge debts. Work hard to reduce you debt and remember, the more income you have relative to your debt, the better."
She further advises, "It is a good practice to contact your creditors the moment you realise you will not be able to pay your bills in time. Try to renegotiate the repayment schedule as soon as you know you will have a problem paying bills on time."
"However, you must remember that it takes time to improve your credit history. At the beginning, it may be frustrating but if taken as a long term goal, it can be achieved. You must also be disciplined and use your credit wisely," Kioko says.
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