Good versus bad credit history and why it matters
In February 2015 I borrowed a loan of KES. 500 from Mshwari. I had become accustomed to borrowing whenever I had a shortfall in my finances back while still undertaking my studies but I usually repaid in time sometimes even before the due date. However, at that point in time I did not honour my obligation as was expected and kept ignoring messages from the lender reminding me to do the same. Eventually, a fine was imposed because of my lack of commitment to repay the loan within the specified time.
I later on kept receiving messages warning me that I risked being blacklisted with credit reference bureaus (CRBs) if I failed to repay the loan within three months after the due date. I was quite naive back then because I did not have a full understanding of what CRBs were and the implications of being blacklisted with them as a result of defaulting on a loan. Back while in campus, we heard stories of how HELB would send demand letters to students after they graduated reminding them to start servicing their loans or risk being listed with CRBs. But since I had no real exposure on the same I decided to leave my fate to time.
My ignorance led me to destroy my phone line (SIM card) because I thought that would help me avoid the reminders from the lender about paying the loan. Besides, I also thought that by purchasing a new SIM card I would be able to have a “fresh start” and thus be able to resume borrowing sooner or later.
It is when I was shortlisted for a job that I became aware of the importance of having a good credit history. As a prerequisite before being onboarded, one had to have a recent CRB clearance certificate or a credit report. I later inquired from one of the CRBs about the cost of getting a clearance certificate. I was advised that I had to first clear the outstanding loan of the lender which had listed me and then pay KES. 2,200 in order to get the clearance certificate. The problem was that I did not have sufficient funds that would have enabled me to pay my overdue loan and also cater for the cost of clearing with CRBs.
I regretted the decision I had made earlier on to destroy my initial SIM card which I had used to borrow the loan. I became aware that one’s default history will still be shown on the credit report regardless of whether they are still using the initial phone line used to borrow or not. This is because CRBs use one’s National Identification Number (ID number) to ascertain borrowers creditworthiness by updating every loan taken as well as the repayment histories. It is worth mentioning that no lender in Kenya would give out a loan without requiring a customer to provide details about their ID number. I later opted to use a credit report whose cost was far much less at KES. 350 as a substitute for the clearance certificate.
A customer is considered to have a good credit history when they honour their loan commitments in time. Failing to repay loans as and when they fall due as well as issuing bouncing cheques are some of the things that negatively impacts a borrower’s credit profile. It is important for distressed borrowers to be open and discuss their financial situations with their lenders so that they can come up with affordable and acceptable payment plans. Borrowers should also consider making partial payments if they are unable to fulfill the required instalments or one-off payments. It is also important for lenders to take the first step in initiating repayment plans with borrowers should they notice that some borrowers are facing financial difficulties.
The Central Bank of Kenya (CBK)earlier this year issued guidelines on listing and one of those guidelines included barring credit reference bureaus (CRBs) from blacklisting borrowers with loan balances below KES. 1000. Although I eventually repaid the loan which I had defaulted, the same was still appearing in my credit report as at April this year as a Performing Account with Default History. The loan history has since been removed from my credit report as a result of the CBK directives. This directive will benefit many Kenyans who sometimes fail to honour their commitments in full by forgetting to pay balances below KES. 1,000.
The process of delisting with CRBs has now been also simplified. All one is required to do is to first clear the outstanding loan that they defaulted and then get a batch number from the lender. They then engage one of the three CRBs in the country namely, TransUnion, Metropol, and Credit Info Kenya in order to get a CRB clearance certificate. It is also important to highlight that as per the new listing guidelines issued by the CBK this year, a first time clearance certificate can be obtained for free. However, subsequent CRB clearance certificates are usually charged and the cost ranges from KES. 2,000 to KES. 2,500.
Active borrowers are usually advised to check their credit reports quarterly (in some cases monthly) in order to monitor their creditworthiness and make adjustments as would be necessary. It is also worth noting that once a person gets cleared with CRBs their data regarding the defaulted loan will still be retained for up to five years. Furthermore, one may have to wait for a certain duration in order to be able to access credit services even after they have settled the loans which they may have defaulted. There are however some exceptions depending on the risk appetite of a credit institution as well as issues such as provision of collateral, subscription to check off systems and/or support by guarantors.
Financial literacy is something that all Kenyans should be made aware of at a young age. Have you ever wondered why there is a huge difference between rural and urban dwellers in terms of knowledge about financial management? It all comes down to exposure and use of various financial products and services. It is critical to inculcate the culture of saving among children so that they can learn good financial habits while young. The basic place to start can be by opening kids savings accounts and encouraging them to set aside part of their “pocket money” into such accounts.
Students in colleges and tertiary institutions should also be taken through a course on personal finance management so that they can be better placed to make informed decisions about how they spend their money. Savings products like bank savings accounts and money market funds would be ideal for students considering it would enable them to set aside funds which they may not easily access and thus encourage responsible spending. Funds saved can be later utilized while job hunting and meeting other equally important bills while out of school. This would also make the transition to the workplace a bit easier.
Individual consumers should also be encouraged to borrow responsibly and avoid taking loans to meet their consumption needs. Loans should mostly be used for productive purposes such as expansion of a business, restocking and purchase of assets that would contribute to the productivity of a business. Student loans are also considered to be an example of good debt because they help unlock new and future opportunities thus resulting in a better return on investment.
