How banks use credit score to determine if you are a subprime borrower


Capital markets

How banks use credit score to determine if you are a subprime borrower

This year, Kenyan banks are adopting a risk-based loan pricing model that differentiates costs for individual borrowers based on the risk of default.

The move to the risk-based model aims to unlock credit for sectors or individuals that were previously deemed too risky to lend by banks – who will now be able to apply a premium on rates to hedge when lending to these borrowers .

One of the factors to consider when deploying a risk-based lending plan is a borrower’s credit score, which basically rates a borrower’s reliability in servicing their loan facilities.

The government hopes a more refined credit scoring system will unlock credit to the private sector and ensure that no borrower is turned down for a loan based on their repayment history.

The Business Daily asked Gideon Kipyakwai, managing director of credit reference bureau (CRB) service provider Metropol Corporation, to explain what is considered when assigning a borrower a credit score and what to do to improve their score.

Payment Performance Behavior

This factor has the highest weight on a credit score, at around 45%. The CRB reviews payment history on previous loans, primarily whether the borrower has faithfully maintained a facility and paid their installments on time.

It helps if the borrower has not had disputes with lenders over payment terms and has avoided callbacks at the loan department. A good payment record gives lenders confidence that they will get their money back from the borrower.

Credit composition of existing loan facilities

Banks are often wary of borrowers who have been caught in a loan renewal cycle, where they are effectively borrowing from one bank to repay loans from another. This is also manifested in loan loading, where a borrower has taken out a diverse mix of facilities from different lenders.

This suggests that a borrower is facing difficulties and cannot independently generate enough income or income to meet their existing obligations. As such, they are assigned a high risk rating when accessing new credit.

For a CRB, this is a red flag and as such, this consideration is given a weighting of around 30%.

Total Debt vs. Income and Trend

Related to the loan load factor, credit rating is also affected by the debt-to-income ratio. The higher the percentage of income allocated to servicing the debt, the higher the risk of default. This takes into account that there are other competing needs that look at the income pot.

The trend of debt growth relative to income is also important, indicating whether there is room for growth or reduction to take on more debt. This factor, and the others below, all get a weighting of six percent or less in the overall credit score.

Processing new loans

The treatment of new loan facilities is of interest to a CRB when calculating a credit score, primarily in terms of collateral requirements.

If a borrower who was previously able to access unsecured loans is suddenly asked to provide collateral, a credit assessor will see this as a sign of emerging difficulties in loan servicing and offer a lower score accordingly.


The demographic factor (mainly age and gender) is also considered in credit scoring, based on the repayment behavior of a particular demographic group.

For example, bank lending data may show that a certain age group has had higher defaults than others, which then feeds into the general perception of risk when a borrower in that group demographic is looking for credit.

Stability factor

Considerations for stability factors are wide and varied, ranging from being domiciled in the same location for a long period of time, maintaining consistent contact details such as cell phone numbers, and staying with one employer for a long period of time. .

Frequent changes in mobile phone numbers, moves and jobs are often signs of instability, which worries lenders. In particular, in the age of digital lending, frequently changing mobile numbers can be a sign of payment difficulties, which has led some people to drop lines in an attempt to evade lenders.

How can you improve your credit rating?

The easiest way to establish a good credit profile is to avoid and, if necessary, quickly resolve any loan disputes.

One should also check their records to make sure they are clean and take action to address issues raised by lenders.

There is also a misconception that avoiding loans keeps your record clean. Demonstrating the ability to repay a loan is a plus for obtaining a good score, as lenders are generally unwilling to grant a high credit score to new borrowers whose repayment behavior remains unknown.

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