Many people worry about their credit score. Some economies make it difficult to survive financially without this number. The score influences many money decisions, including buying or renting a house.
Developing countries don't have a strong correlation between everyday life and credit scores. Many people come across this when wanting to borrow from financial institutions. Landlords generally do not ask about the number.
How is your credit score calculated? Should increasing it be your primary focus when looking to build wealth? Let's look at the components that determine your credit rating.
- Outstanding Balances
According to one of the leading Credit Bureaus in Kenya, outstanding balances are a factor that can determine your credit score. Do you have any balances with any lenders who align with the credit bureaus? Did you know that suppliers can report outstanding balances to the Credit Bureaus?
The higher the outstanding balances, the more likely you will access less credit. For example, people with payslips where large portions go to paying loans find it harder to access additional loans. There are limits that financial institutions use to determine whether you should access more credit even if you are a good payer.
The policies of the maximum amount of pay for paying debt varies. In Kenya, the limit is no more than two-thirds of your income. Financial institutions with integrity will not lend past this limit.
- Total Available Credit
When you decide to borrow, you will notice a credit limit offering. The amount lenders are willing to give you is the total available credit. How often you borrow and repay can determine this figure.
The lower the total available credit, the more likely other lenders will limit how much they make available to you. The lender wants to minimize their risk even as they grow their business. They, therefore, consider how other market players categorize you.
For many lenders, the more you borrow and pay on time, the more likely they will increase the total credit available. Even then, within financial institutions, there are general guidelines on the maximum amount they can lend to an individual regardless of your capability to pay. Government policies regulate how much an institution can, for example, lend to an individual out of their total loan book facility.
- Late Payments
Some people notice a decline in the amount available for borrowing when they delay paying back. The message to lenders when you pay past the due date is that you are financially struggling. Some may also feel you don't have integrity.
Some lenders share information, which may lead to lesser amounts available for borrowing subsequently. Some people experience a complete shutdown of borrowing options when they decide to pay after delaying. A lender promising another loan when you pay up after a delay is a common trick.
You can choose to restructure your loan in case of difficulties. During COVID, the Kenya government created a leeway for late payments, which was not to affect your credit score. Even with such programs, there was an end date for a return to the status quo.
Debt Free Living 254 Mindset
At Debt Free Living 254, we agitate for using your income as your primary wealth-building tool. We advise you to focus on building your net worth. Aim to earn, not pay interest.
Are there exceptions? Mortgages. Paying for or building using cash is preferable.
Debt comes with risk and can limit how fast you achieve your financial goals. We are aware this mindset goes against general advice. Focus on building your net worth as fast as possible, as you aim to have enough assets to live on passive income with minimal risk.
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