How to utilise the Credit Reference Bureau

When Bernadette discovered that commercial banks are set to share their client’s credit history, she hurriedly put her supermarket business on sale. Her hopes to secure a loan facility to finance the business came to a grinding halt. Three years ago, she had secured a loan of Shs44 million to try her hand in the timber hardware business, which later collapsed, plunging her into debts.

Meanwhile, with defaults growing, Bernadette continued to make several loan applications to other commercial banks, seeking some cash to stock her supermarket.
When she learnt of the advent of credit referencing, she was convinced that her chances of securing loans in future had disappeared.

Bernadette’s scenario illustrates the extent of confusion that has hit the local lending scene with the introduction of the credit reference concept. With the start of the credit reporting scheduled, numerous myths have been circulating that obscure the real benefits borrowers will derive from having clean credit histories. Although not limited to these, the following are some of the misconceptions floating around.

A bad credit history denies one access to future loans
This is false. If a borrower like Bernadette defaults on loans, lenders will submit the information to a credit reference bureau for sharing with other credit providers.
The default record will then be part of a client’s credit history and this does not mean that one cannot access any further loan facility. All it means is that whenever you approach any lender, ‘they will take extra caution in their decision due to the degree of risk involved in lending. Based on their own policies, lenders can either lend you on tight conditions or deny you credit.

Credit Reference Bureaus make do not make lending decisions for banks
The lending decision still remains with banks. CRBs only acts as a system which facilitates credit information sharing - a process where lenders and other credit providers submit and share information about their borrowers’ repayment habits.
Lenders only credit reports generated from a bureau as part of their lending decision process. Such reports guides the lender to make informed credit decisions.
CRBs act as dispute resolution points for declined loan applications
Many bank customers assume CRBs act as a point to report disputes or complaints on declined loan applications by lenders. This is not true.
Every lender has its own policies on the acceptable risk levels which they can take up. In case your application for a loan facility has been declined by a lender based on the information provided on a credit report, then you as the borrower are entitled to receive a notice from the bank. You will then get a free credit report from the bureau. However, where the lender makes the credit decision based on its lending policies, you would only be informed of the rejection.

Banks will have universal lending rates to borrowers
Every lender has its own lending rates which are pegged on the acceptable risk levels. Given this, one lender may perceive lending you as more risky than the other and so the rates will be different.
With a good credit history, you as the borrower will have the opportunity to negotiate for cheaper and lower lending rates whenever you need a loan facility.

No collateral win be required on loan applications
Lenders will use credit reports obtained from bureaus as part of the lending decision process. Where the lender considers a borrower risky, you could either be denied credit or face tougher conditions which may include higher lending rates and submission of collateral.
Conversely, if the lenders are aware of your good history, you could benefit from lower interest rates, affordable repayment terms or less collateral. For good payers a detailed credit reports will become good collateral to lenders.

I have never taken a loan and so I have a clean credit history.
If you have never taken any loan it means that you have no credit history yet. You have not demonstrated the ability to pay back and promptly.
Therefore to have a credit history, you have to open a credit account to establish a line of credit that will become the foundation of your credit history. You cannot buy a credit history, you have to live it.

No credit record at the bureau means clean or good credit history
This is a myth that could have a severe impact on the lenders decision. Currently the banking act requires lenders to share negative information about their customers with other banks through a credit reference bureau. A customer who has never taken a loan facility but has defaulted on other utility debts such as water, electricity would not have his credit history reflected at the bureau.

Therefore in such a case, absence of a credit record on the customer at the bureau cannot be inferred as a good credit history but only an indication that either the customer has never taken a loan or had taken and repaid promptly. However with future plans of sharing even positive information and information from other sources such as utility providers, a credit report gives a complete picture of a potential borrower.

Keeping off from loan transactions would keep your credit history clean.
With the news of the advent of credit referencing, many bank customers have resolved to stay away from credit transactions to preserve their credit history. Keeping off credit transactions can only preserve your credit history if you are sure that owing to your financial constraints, you would not be able to pay your debts promptly. Otherwise numerous credit trans-actions with a positive repayment history will enrich your credit history.
Opiyo is a personal financial consultant with Money-Plan Advisory Solutions. [email protected]