Techniques to Increase Your Credit Score: Microfinance Edition
While microloans are gaining momentum, these financial services aren’t just designed for small businesses to cover the cost of their operational needs. With the right tactics, they can come in handy as a credit-score building device. Just check it out!
Understanding Microfinance and Credit Scores
Cooperating with microfinance institutions (also known as MFIs) allows you to obtain financial support for business and individual goals — up to $50,000 or more, depending on the chosen lender and agreement type. The way you handle microloan repayment is monitored and reported to local credit bureaus. In addition to national institutions in the banking system, MFIs may also feature internal scoring systems, which will impact how easy it is to apply for a deal and secure more favorable terms and conditions.
Why Your Credit Score Matters in Microfinance
The main reason to keep control over your credit score is simple — that’s how you boost the probability of loan approval and access to better agreements in general. Better scores can help you qualify for loans with greater financial limits, lower interest rates, and more flexible repayment terms and schedules. Failing to maintain a good credit score may ruin long-term trust with MFIs and other kinds of financial cooperatives in the market.
Review Your Credit Report for Errors
This stage is crucial as it helps you clarify what data you have at the moment and what adjustments are needed to improve your strategy in the microfinance industry. Start by contacting local credit bureaus and obtaining your credit report. Here is what you need to do next:
Analyze the report and check for any inconsistencies and errors, including incorrect loan amounts, duplicate accounts, missed payments, etc.
Dispute any issues as soon as possible — reach your MFI or the bureau itself.
Track the evolution of your report, especially after loan repayments and other crucial periods of your microloan-related activities.
It won’t be extra to acquire the means to verify your repayment history, so keep the records of your payments.
Pay Microloans on Time
Sticking to your repayment schedule as precisely as possible is a nice tactic. Before trying to cover the cost of your microloan ahead of time, make sure that there are no penalties associated with this action. To stay consistent, feel free to use automatic payments or set reminders for maximum diligence on your end. In the best-case scenario, your initial agreement covers any payment-related difficulties with special troubleshooting strategies. Otherwise, inform the lender about any issues and try to solve the problem.
Maintain a Healthy Credit Mix
You do you — there is no need to experiment with different companies and microloans to achieve the best results quickly. Still, trying to balance a mix of personal and business loans may have a positive impact on your credit score, showcasing your skills in managing different credit responsibilities. Nonetheless, don’t borrow more than you truly require.
Limit Your Credit Utilization Ratio
Maxing out your loan limits isn’t the right strategy. Instead, calculate what sum you need and stick to it — you don’t have to borrow more than you can afford. Whenever possible, it will be smarter to keep your loan balances low. It will help you handle them quickly and effectively, boosting your credit score. Otherwise, you will signal suspicious behavioral patterns to lenders. Instead of proving your creditworthiness, you may end up having no funds to stick to the repayment plan and risk losing the deal.
Avoid Taking Multiple Loans at Once
The rule of thumb is clear — forget about taking loans to cover the cost of other loans. Too many active agreements are telltale signs for bureaus and lenders that you are over-dependent on borrowing and may not meet the deal’s terms to the dot. It’s recommended to apply for a new microloan only after the current one is successfully closed. Seek professional assistance if you are interested in handling a few contracts but lack the confidence and knowledge to do so.
Build Credit History Through Small and Regular Loans
Your consistent approach matters. If your goal is establishing a good credit score, you don’t have to rush things — start with low-value loans. They won’t be extremely challenging to repay on time, but will contribute to your credit score in the long run. Large loans may be tempting, but they are worthless if that’s not what you need at the moment. This way, you may just waste the received budget and fail to relocate your resources with the utmost efficiency possible.
Don’t forget to check whether the target MFI does report the information about your repayments to credit bureaus. There are organizations that skip this step.
Avoid Defaulting and Learn from Missed Payments
First things first, you have to understand what actions constitute a default. In a nutshell, this scenario takes place when your loan repayment is overdue beyond a preset timeframe by thirty to ninety days, depending on your agreement. Even a single missed instalment can drastically decrease your credit score.
From this perspective, it’s a must to come up with a realistic repayment plan and tools that will help you stick to it. Define your income patterns to see what repayment schedule suits your needs the most. Don’t overlook the importance of emergency savings — ensure your budget can afford extra spending here and now.
If you foresee a delay and can’t solve it, inform your lender immediately. Transparency and honesty are the two must-have steps for your communication with the chosen service provider. This way, it will be easier to opt for loan restructuring options, rescheduling, grace periods, and other troubleshooting strategies.
If you have already missed a payment, it’s high time to analyze when things went wrong and learn from your mistakes. It will let you adjust your financial habits in a data-driven manner, tracking your spending, reducing non-essential purchases, setting reminders for timely repayments, and so on.
Monitor Your Credit Score Regularly
That’s how you can control your performance and improve your financial behavior once any issues are spotted. At the same time, it’s a nice way to locate fraudulent activities with your account and get related problems solved with ease. Stay in control of your actions in the microfinance industry, ensuring each decision boosts your credit score and not vice versa.
