How To Rebuild Your Credit in 6 Simple Ways
When my wife and I decided to get married, we made up our minds on having a big white wedding. We had always wanted a royal theme and because weddings only happen once, we took a personal loan.
That loan (and Pinterest board!) helped us get our dream wedding that our friends still talk about and a vacation in Zanzibar where my wife had always wanted to go. We decided to spend the first two years afterwards paying off the loan. No big deal, right? Wrong!! Two years down the line, we still had not managed to pay the loan and we were deep in debt. While I never regret having a big wedding, I do regret not planning for it earlier.
While personal loans enable to you to enjoy experiences, remember that they earn interest. If you get into debt like I did, you can rebuild your credit in 6 simple ways. It takes discipline but it is not impossible – let’s dive in on how to do this:
1. Proactively Manage your Creditors
Creditors are people just like you and me and appreciate cooperation. Contact your creditors and explain your situation upfront. From there you can get their advice to then proceed to arrange for a payment plan including method, date and amount included. If you have had a good credit score before and this is your first debt, ask for leniency and come up with a plan that you know you can deliver on.
2. Make the Payments on Time
Now that you and the bank have come to an agreement on the payments, pay them on time. It is of most importance to make sure you keep your word and deliver. When it comes to your payment history – the ability to make payments on time makes about 35% of your credit score.
3. Cut back on Expenses
You will need to develop a budget that includes the debt repayment and account for every shilling. Cut back on miscellaneous expenses and let that money go to the creditors. Netflix, eating out and a few beers after work may be how you bond with with your pals but you’ll need to give that a rest or reduce frequency. If possible, join table banking or chamas which, by the way, are not just for the ladies. With chamas it is easier to save extra or loose change especially when tightening your belt.
4. Have a Good Credit Mix
I have a lot of friends who are newlyweds (and some new parents!) and most of them think that all credit is the same. However, I’ve learned that this is not the case and it is important to have a mix of installment and revolving credit. Installment loans are payments that are fixed such as car payments, installment loans and personal loans while revolving credit is credit that changes; retail cards and credit cards. Revolving accounts affect your credit the most so ensure that those are the ones that are attended to (and kept low) first.
5. Credit Usage/Utilisation
This is based off of revolving credits (Credit Cards, Retail cards). Credit utilization should not exceed 30-35%. In layman English, what this means is that if you earn Ksh 30,000, then you should have credit card debt of Ksh 9,000 or less in any given month.
6. Authorized User
Adding a user with good credit on your credit profile will increase your scores. It should be someone who has good credit you trust (like your wife I hope).
What I learnt the most from my experience is:
First, start saving early (even a year) for big purchases so that your personal loan is a size you can manage to pay off! I cannot stress this enough.
Secondly, instead of taking a loan try the savings approach. I wished I had saved up to cater for my wants. Now I know how important it is to save for the goals and the milestones that you can see in the horizon; your marriage, a house or even college tuition.
Finally, it is best to set automatic transfers once you receive any amount of money into your savings account. This way the bank saves for you and saving is not as hard anymore.
At the end of it all, keep reminding yourself that you can do it!
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