The Central Bank of Kenya recently advised Kenyans to begin taking seriously timely repayment of their loans following the recent improvements in the Credit Information Sharing (CIS) that now require CRBs to generate borrowers' Credit Score which lenders can use to assess their creditworthiness.
A Credit Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay, and how much it will cost (the interest rate).
How is Credit Score Calculated?
Well, according to FICO it is mainly based on the following five factors:
1. Payment History (35%)
This component shows your ability to make loan payments on time. The more positive your payment history, the better your score.
2. Amount Owed (30%)
This factor includes the total amount you owe in loans. The lower your loan amount compared to the loan limit accessible, the better it is for your credit score.
3. Length of Credit History (15%)
This element takes into account both how long you've been using credit in general and the average age of all your loan accounts. As a result, avoiding unnecessary borrowing and using credit over time are both good things.
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4. Credit Mix (10%)
This credit factor considers the different types of credit accounts you have, such as credit cards, student loans, mortgage loans, among others. However, your credit mix won't affect your score much unless your credit report doesn't have a lot of other information to use to calculate your score.
5. New Credit (10%)
Every time you apply for credit and a creditor runs a hard inquiry on your report, it could knock a few points off your credit score. If you apply for multiple credit accounts in a short period, it could be a red flag to potential lenders.
In conclusion, depending on where your credit score stands, the above factors are the one you should examine to determine what needs to be addressed to improve your credit score.
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