What is Credit Record?
“A record of one’s payment history on current and previous debt. If one makes payments on time and does not acquire an excessive amount of debt, one’s credit history is likely to be good. This makes an individual a good risk if he/she wishes to borrow more money. On the other hand, if one has a history of late payments and/or default, the individual is likely to be a bad risk and may be denied credit….” Financial Dictionary.
The Economic Dictionary defined credit history as “A document often accredited to an individual or company outlining their borrowing, lending and repayment habits over a certain number of years. It is basically used to see if they are responsible with loans and other forms of credit, and the likelihood of them paying back a new loan should they take one out”.
Your credit record is a summary of your borrowing relationships with banks and other financial institutions or money lenders. It shows how you have performed with borrowings in the past and it helps lenders to assess the risk inherent in your credit request.
A potential borrower with history of defaults on previous loans from lenders is unlikely to get a new one while a good credit record gives you an excellent opportunity for a new loan. A potential borrower with no credit history is somewhat viewed as worse that a client with bad credit history because the lender has no record to judge the performance risk inherent in the loan you are about to take.
Here are ways to avoid ruining your credit history.
1. Ensure you fund your account before loan repayment due date
After the loan offer have been accepted by you and the loan disbursed into your account or otherwise depending on the loan type and dynamics, a repayment date would have been fixed and advised to you.
It is your responsibility to fund your account on or before the loan repayment due date. Providing funds in your account on or before the loan repayment due date shows you are a responsible borrower and this helps your credit score and history greatly.
2. Request your bank to restructure your facility if you foresee inability to fulfill repayment obligations.
“A stitch in time saves nine” as the popular proverb goes. A borrower should proactively inform the lender with verifiable evidence if he foresees his or her inability to fulfill repayment obligations on the due date and also ensure the lender restructures the repayment to align with the date he will be able to pay. This will ensure his credit record remains good and not unnecessarily dented.
3. Ensure your loan repayment date aligns with your cash flow.
To avoid struggling with loan repayments and subsequently defaulting on your loan, you should ensure your bank aligns your loan repayment due date with your cash flow.
A salary earner should know the day of the month when his employer pays his/her salary and should advise his bank to fix his repayment date on his pay date to avoid default. A business owner should also know his conversion cycle and thus ensure his loan obligations is made to fall due when his business will be liquid enough to pay.
4. Ensure your Debt Service Ratio is within acceptable limit
Debt Service Ratio (DSR) refers to the ratio of your earnings that is allowed to be used to service your debt. The acceptable ratio for mortgage is 40% while 33.3% is acceptable for other loan types.
The essence of DSR is to allow you enough funds for other expenses from your income order that the loan repayment. This will ensure you don’t get choked up and not able to service your debt.
Keeping repayment amount within the acceptable DSR limit is advised so you are not overburdened by expenses and get tempted to want to default on your loan.
5. Do not borrow when you cannot afford to pay back.
One of the major reason why your bank will advance you credit is because you have a verifiable source of repayment. A major challenge in credit analysis however, is request by customers who base their loan repayments on speculations, speculative cash flows are most time unrealistic and may not be relied upon for loan approvals.
Borrowing against speculation in an uncertain economy like Nigeria may ruin your credit ratings
6. Avoid jumping on the bandwagon.
There are instances where people request for credit because a friend or colleague have just had a loan approved for him/her even when they don’t have need for such loan. Credit must have a purpose otherwise the lender and the borrower have laid the foundation for default from the date of request.
Avoid borrowing because other are borrowing even when your repayment source or cash flow is good enough to get credit. There is high tendency of not showing enough interest in paying back if the loan was not judiciously used.
7. Borrow to fulfill needs and not wants
Loans are meant to fill the need gaps and not to fulfill desires. Borrow because you have needs to fulfill with the loan and not because you want to meet up with some societal or social circle to avoid ruining your credit records.
There is high tendency of increased appetite for more borrowings to continue to belong to a social circle you forced yourself into.
8. Ensure your loan account/s are closed after the loan is liquidated
A very important part of loan cycle is closure of loan accounts once facility have been liquidated. Ensure your bank closes the loan account/s once you have paid down.
There are instance where customers that have since liquidated their facilities suddenly realizes that they have outstanding loan obligations after years of liquidated loans. This of course affected their ability to secure credit with another bank because of such mistakes. Unclosed loan accounts may continue to accumulate debits without the knowledge of the borrower.
9. Close all bank accounts you no longer use.
Very importantly is the fact that you should close all bank accounts you no longer need. Charges like SMS alert charges will continue to accumulate on such account as long as they are not closed and this may consequently dent your credit record when such accounts goes into debit.
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