Your credit score ( a three-digit number lenders use to help them decide how likely it is they’ll be repaid on time if they grant you a credit card or loan). It is an important factor in your financial life. The higher your scores, the more likely you are to qualify for loans. And credit cards at the most favourable terms, which will save you money.
If your credit history is not where you want it to be, you’re not alone. Improving your credit scores takes time. But the sooner you address the issues that might be dragging them down, the faster your credit scores will go up. You can increase your scores by taking several steps, like establishing a track record of paying bills on time, paying down debt.
How Credit Scores Are Calculated
You likely have dozens, if not hundreds, of credit scores. That’s because a credit score is calculated by applying a mathematical algorithm to the information in one of your three credit reports, and there is no one uniform algorithm employed by all lenders or other financial companies to compute the scores.
You don’t have to get hung up on having multiple scores, though, because the factors that make your scores go up or down in different scoring models are usually similar. What makes one score go up versus down is always going to be the same—it just depends on the degree.
Most scoring models take into account your payment history on loans and credit cards. How much revolving credit you regularly use, how long you’ve had accounts open, the types of accounts you have and how often you apply for new credit.
Establishing or Building Your Credit Scores
If you simply don’t have a credit score because you have little experience or history with credit, you likely have a thin credit file. That means you have few (if any) credit accounts listed on your credit reports, typically one to four. Generally, a thin file means a bank or lender is unable to calculate a credit score because there is not enough information in a user’s credit history to do so.
There are things you can do to fatten up your thin credit file, such as applying for a secured credit card, becoming an authorized user on someone else’s credit card or taking out a credit builder loan.
How Changes Affect Scores
One common question involves understanding how specific actions will affect a credit score. For example, will closing two of your revolving accounts improve your credit score? While this question may seem easy to answer, there are many factors to consider.
- Credit scores are based entirely on the information found on an individual’s credit report.
- Any change to the credit report could affect the individual’s credit score.
Simply closing two accounts not only lowers the number of open revolving accounts, but it also decreases the total amount of available credit. That results in a higher utilization rate, also called the balance-to-limit ratio (which generally lowers scores).
One change can affect many items on a credit report. It is impossible to provide a completely accurate assessment of how one specific action will affect a person’s credit score. This is why the credit risk factors provided with your score are important. They identify what elements from your credit history are having the greatest impact so that you can take appropriate action.
Within Kenya, we have three institutions with clearance to check on none performing loans, Transunion, Metropol and CreditInfo. Consult their sites to check your credit score.