Is a credit card your gateway to financial freedom?

Factors that determine your creditworthiness, how to improve your credit score, and how you can use your credit card to build your credit score.

“If you don’t take good care of your credit, then your credit won’t take good care of you.” ― Tyler Gregory

What is a credit score?

The first thing that financial institutions think about when you walk into their offices or call them to ask for a loan, is your ability to pay back. Your ability to pay back on time. It’s bad business for them if you can’t pay back because this simply means they’ll lose their money.

How credit cards build credit

Credit bureaus create your credit reports based on data they receive from financial institutions. Financial institutions such as banks, credit unions, Saccos etc send your financial data to these bureaus.

Factors that determine your creditworthiness

1. Your current amount of debt

Just because you have a huge amount of available credit, doesn’t mean you should be out there applying for loans.

2. Debt payment history

Have you been paying your other loans on time?

3. Your debt payment history

The longer your credit history, the lower the risk for the bank. This is because it gives them enough data to work with to determine your creditworthiness.

4. Time

How long you’ve had credit?

5. Type of credit

Different types of loans (student loans, mortgage, credit card, auto loan etc) are judged using different parameters. A credit card loan is not treated the same as a mortgage.

6. Timely payment of bills

Yup, this also determines your creditworthiness.

7. How often you check your credit score

If you keep requesting for more reports, the system thinks that you are shopping for more loans and getting rejected which lowers your credit score.

Why your credit score matters

1. You get higher interest rates if you have poor credit

It’s common for a financial institution to charge you a higher interest rate if you have a bad credit score. This how they protect themselves against the risk that you might not pay back, or you might not pay back on time.

2. It determines the initial deposit amount when applying for a mortgage

For loans that require a down payment, your credit score is used to determine how much an institution can give you. The higher your score, the higher the amount.

3. Negotiating for interest rates

If you have a good score, you can negotiate with the institution to reduce your interest rate, increase your loan limit, consolidate your credit card debt and more.

4. It determines your credit card limit and interest rate

Financial institutions will use your score to determine how high they should set your credit card limit or how much interest rate they should charge you for the same.

How to improve your credit score

1. Pay your bills on time

This includes utility bills, all loans and credit cards.

2. Acquire loans only when needed

Don’t open unnecessary lines of credit especially if you know that you won’t be in position to service them.

Benefits of using a credit card

1. It helps you build your credit score!

When you want to buy a home, start a business, buy a car, or anything that you’d want to acquire a loan against, the financial institution will use your credit score to determine the amount and interest rate to give you.

2. You’re literally borrowing money for free

This is if, and only if, you make maximum payments every month. Otherwise, it’s the most abused, misused and misunderstood form of debt.

3. You get reward points

The most common forms of reward are air miles, cash back (1 to 2% of the transaction), free vacations, hotel stays, and access to airport lounges.

4. Fraud protection

Since you’re using other people’s money when you pay using a credit card, you’re not responsible for unauthorised purchases. With so many fraudulent crimes while buying stuff online, you want to protect yourslef from losing your money.

5. If your card is stolen, just call the bank to block it

Unlike cash which you’re unlikely to recover.

6. In case of fraud, you get your money back

Banks are very swift to help you solve fraud cases because well, it’s their money. You don’t get the same protection when you use your debit card.

7. Convenience

Faster as compared to cash. I also realized that some hotels don’t accept cash or debit cards for reservations.

8. It can sort you out when you have an emergency

If you have an emergency such as a hospital bill, you can use your credit card to pay for it then use the 1 month grace period to figure out how to pay for it.

Disadvantages of credit cards

1. Interest rates are extremely high

They charge an Annual Percentage Rate of 20 to 30%. This is ridiculous because you can’t find an investment with such a high rate of return! The way to escape losing that much money is paying your card in full every month.

2. The fees and penalties

If you miss a payment, you’re charged.If you make a purchase in a different currency, you get charged conversion fees.

3. It can lead to excess spending if not controlled

As much as I’m quite good with money, credit cards incentivize me towards spending more.

Travelling with credit cards

A lot of people don’t know that when you make a purchase in a different currency, you be charged conversion fees. This costs the bank nothing but oh well, they have to make money.

Which credit cards are the best?

Deciding which credit card to go for can be a daunting task, especially if you live in a country that has different types of credit cards on offer.

How many credit cards should you have?

How many credit cards is too many?

Good debt vs bad debt.

For somebody who’s terrified of debt, I can’t believe I’m about to say this.



Your voice of reason before you blow all your money this weekend!

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