Fixing a poor credit rating

Alexander Maloba, 36, started his financial life on a wrong footing — he defaulted on an unsecured loan.

But the Nairobi-based sales executive is now scared. From this month, all banks in Kenya will be required to be submit information on non-performing loans and other information to licensed credit reference bureaus every month.

Once the reporting structure is effectively in place, it heralds turbulent times ahead for people with dented credit history.

For Maloba it will be difficult to obtain credit until he repairs his credit history.

"My engagement with commercial banks is not yet over," he says. "I am yet to get a permanent job, set up a business, educate my children, and own a home.

The help available for Maloba is fortunately simple and time-tested and may indeed prove to be the best kept financial secret under the new credit reporting dispensation.

According to Financial Sector Deepening (FSD), formed in 2005 to support the development of financial markets in Kenya, credit reporting is "a system which enables banks to share information about how borrowers pay their loans." Previously, this feature was not in Kenya, but the rise in the loan defaults rate and the need to move away from pegging credit to collateral prompted the recent development, which is a standard practice in developed economies.

Credit reference bureaus use credit scoring — a statistical technique of assessing a borrower’s creditworthiness with the aid of credit scoring models — to indicate how creditworthy one is.

Major concern

That the credit history will be the major determiner of whether a bank will give credit to one or not means that the next major concern to most people will be how to repair a dented credit history.

A bad credit history has implications. You could be denied a loan, or get it at a higher interest rate than another person with a clean credit history. A bad credit record could also lead to a delay before loan application approval.

Personal finance experts offer varying viewpoints on how one can repair a dented credit history, yet all point to an individual as the one to determine their credit worthiness.

But its tough to say one has the ultimate responsibility when they are poor at personal finance management and are saddled with a debt mountain yet without a job.

That’s exactly the predicament that Maloba and many others are staring at.

But having a damning credit history isn’t the end of the world; on the contrary, one can actually triumph in credit restoration, experts say.

The first thing to do towards repairing a dented credit history is to create a personal budget. Given that falling into odious debt traps is a product of poor financial management, a budget is an essential tool that could enable you to tame unplanned spending. With a budget, it is possible for one to track their expenses while living within one’s means.

Secondly, calling one’s creditors in case of sudden job loss or inability to service a loan to renegotiate for reduced monthly payments and general repayment terms; and to keep one’s accounts current could be yet another simple, but prudent, step.

Job loss

Maloba, for example, was earning about Sh30,000 a month, but his loss of job didn’t imply he was devoid of any income; in fact, his little photo copy shop on River Road was returning a net monthly profit of Sh10,000 from which he could spare Sh2,000 each month to service the loan.

"I should have visited my bank for re-negotiations; it would have made a tremendous difference," Maloba says.

It is envisaged that in the future once the basic credit reporting system has gained firm footing in Kenya, information from other sources like water and power companies could be incorporated to help banks assess one’s ability to pay.

Due to this reason, payment of bills on time could go a long way towards improving one’s credit score.

In addition, paying higher education loans on time is another key step towards repairing a dented credit history.

According to FSD, "Customers have the right to view any information about them held in a credit reference bureau."

Regular checking

Personal finance advisors thus recommend that one should ideally be regularly checking their personal information regularly to ensure accuracy.

In case of errors, one can correct them by writing to the reporting credit agency.

People with unused credit cards can also significantly improve their credit score by closing them down officially. This is because lenders often look at how much money one can borrow. An extra card pushes up the borrowing limit and risk of default.

In developed economies, there are credit repair experts whom people with distorted debt histories turn to for help. It is envisaged, such services will be available for people like Maloba once credit reporting takes root in Kenya from next month.