Having a good credit score is one thing that makes you financially healthy. A good credit score can give you access to the best loans, leases, mortgages, and credit cards. But what if your credit score isn’t good? When it comes to poor credit score, there are steps on how to improve your credit score.
Remember, rampant misinformation and myths abound. Still, there is a proven myth about improving your credit score that won’t fade: “Checking your credit score regularly and seeing the factors causing the low credit and working on it can improve your score”. Lenders can be reluctant to approve your loan when you have a poor credit score.
Banks and lenders ensure that individuals’ credit score is good before they consider lending. To avoid the risk of lending to a customer who has a high possibility of defaulting on repayments. But when you already have a poor credit score, there are ways to improve on it and that will be the center of our discussion in this article.
What are credit scores
Credit scores are an important factor that helps lenders decide if you can repay your loan. They are created from the information on your credit report. On the other hand, if you have a poor credit report, lenders might charge you a higher interest. Note that credit scores are information in your revolving credit.
Steps to improve your credit score
The first step you take in improving your credit score is by checking your scores on any of the CRBs agencies online. When you see your score, determine which of the factors affected your credit score. With these factors noted, you then map out changes to improving it. Moreso, you need to give it time for the changes you made to be reported by your lender before it reflects in your credit score.
Focusing on the actions that will improve your credit score, follow the steps below:
1. Pay your bills on time
Lenders review credit reports to request for your credit score. They are much interested in how reliable you are in loan repayments. That is because past repayments history affects the future performance. You can influence this by making your loan repayment on time.
In addition, paying late or defaulting negatively affects your credit score and leading to bad credit. However, you need to pay up all loans on time, whether student loans or any other loans. Likewise using resources like automatic payments or calendar reminders helps ensure you pay on time. If you are behind any payment, bring them forward as soon as possible.
2. Apply for loans and open loan accounts when you need it
Avoid applying for loans and opening a loan bank account when you do not have any serious need for funds. Unnecessary credit can harm your credit score in various ways. It harms your credit report by tempting you to overspend and accumulate debts. Always apply for new credit when you are in need of money.
3. Do not apply for too much loans either as an individual or a group
Applying for new loans as a group when you already have an individual loan running can increase your overall credit limit. These multiple loans often create a hard inquiry on your credit and it negatively affects your credit score. Only seek loan in moments where it is unavoidable.
4. Report any inaccuracies you notice on your credit report
It is recommended you check your credit report on all three CRBs we have in Kenya for any inaccuracies. Incorrect information on your credit reports brings your score down. If you have any error(s), report it immediately to the appropriate authority and correct it right away. Monitoring your credit regularly helps you spot errors that can reduce your scores.
5. Pay off your debt
Unwillingness in debt repayments may make you feel convenient, but you cannot escape the bad effect. When you pay off your debt, your credit score will benefit. It is better to have a means of repayment before taking out a loan. If not, your credit will suffer.
6. Consider debt consolidation
Having different streams of credit and loan running may prove detrimental to your credit score report. You can take up a loan and consolidate different debt accounts so that they are controlled, managed and paid off from one source.
7. Manage your credit card funds properly and do not consider closing unused credit card accounts
When you fail to manage your fund well, your credit card debt will accumulate. Credit cards are a major contributor to debt repayment defaults. Never consider closing unused credit card accounts. This may increase your credit utilization ratio.
8. Spend responsibly
Lastly, work on your spending because you can avoid default and late repayment by spending prudently. Keeping your credit record positive by spending responsibly can boost your credit scores. This can be achieved by setting up a budget, single out your priorities and living within your means. All these factors can help increase your credit score.
How credit scores are calculated
Credit Reference Bureaus in Kenya calculates credit scores by applying a mathematical algorithm to the information provided by lenders. Their scoring models take into account the following factors:
- Payment history
- Loan amount you regularly apply for and how often you apply for loan
- How long you have had the loan account opened and the type of account you opened.
How long it takes to rebuild your credit score
When you have negative information on your credit history or report, try to pay up all your outstanding loans. TIME is your ally in improving on your credit. The amount of time it takes depends on the reason for such a negative score.
Rebuilding your credit score takes time. Have patience and know that there is no shortcut to it.
How changes and quick loan repayment affect your credit scores
One change can affect figures on your credit report. There are factors surrounding the changes in the credit score. They are:
- Any changes you made or loan repayment you made to the credit report affects your credit score.
- Information on your credit report determines your score. Your credit score depends on your credit report.
Decisions taken after accessing your credit score
The information on your credit score and loan application form might be used to decide:
- Whether to lend you fund
- How much to lend you
- The interest to charge you
Your current financial information has the greatest impact on your credit score.
An improved credit score can open doors for you. From helping you get the best loan with a competitive interest rate and terms to influencing how much you pay as insurance fee and other additional fees. Your credit reports and scores are considered when you are seeking for a job, renting an apartment and getting a lease.
Considering how important credit scores are to your overall financial aspects, it is advisable you assimilate the contents of this article and do everything you can to improve your credit score. Note that checking your credit score regularly is the first step. See the factors affecting it and focus on those factors first to improve your credit score.