Access to credit through mobile apps like M-Shwari, Tala, and Branch, alongside traditional banks, has transformed financial inclusion in Kenya. Despite this, nearly a million Kenyans were listed as defaulters by Credit Reference Bureaus (CRBs) in 2024. Poor credit decisions can trap individuals in debt cycles, inflate interest rates, and hinder future borrowing. Avoiding common pitfalls is crucial for maintaining a healthy credit profile.
Over-Borrowing Beyond Your Means
One of the most frequent mistakes is borrowing more than one can comfortably repay. Many borrowers apply for the maximum loan amount offered, ignoring actual needs. For instance, qualifying for KSh 100,000 does not mean it is wise to take the full amount if only KSh 20,000 is necessary. This can result in unaffordable monthly installments, especially since digital loans may charge up to 1.5% daily interest. Experts recommend using tools such as the Central Bank of Kenya’s loan calculator to ensure repayments do not exceed 30% of one’s income.
Ignoring Loan Terms and Fine Print
Rushing through loan applications without reviewing the terms is another common credit mistake. Hidden charges, including processing fees, insurance, or penalties, can reduce the net loan amount by up to 20%. For example, a KSh 300,000 loan may yield only KSh 270,000 after deductions. Borrowers should also understand the type of interest applied, whether flat or reducing, and check early settlement clauses to avoid surprises.
Taking Multiple Loans Simultaneously
Applying for multiple loans at the same time can severely impact credit scores. Each loan inquiry is recorded in the CRB system, and missed payments can lead to blacklisting after 90 days. Since lenders share this data, future loan approvals become more difficult. Financial advisors suggest limiting borrowing to one active loan at a time and consolidating existing loans through saccos, which often offer lower interest rates (around 12% per annum compared to 36% charged by mobile lenders).
Borrowing for Non-Essential Consumption
Using loans for luxury items or lifestyle expenses, such as gadgets, vacations, or social pressures, diverts funds away from productive uses. The CBK reported that 40% of defaults in 2023 stemmed from lifestyle loans. Borrowers are encouraged to prioritize expenses that generate returns exceeding the loan cost, such as education or business investments.
Neglecting Your Credit History
Many borrowers do not check their free annual CRB reports and remain unaware of errors or late payments that can lower their credit score below 600. Digital lenders now consider credit histories in loan approvals, making high-risk profiles more likely to be denied. Positive credit building can include timely payment of utilities, using secured cards from banks like KCB, and consistently meeting loan repayment deadlines.
Dealing with Unverified Lenders
Fraudulent lending apps promise instant cash but may impose exorbitant interest rates or compromise personal data. Kenyans are advised to deal only with CBK-regulated lenders and verify them through official websites or the Capital Markets Authority (CMA) portal, avoiding offers from social media or unofficial links.
Poor Repayment Planning and Timing
Borrowing without a clear budget or during financial crises can lead to repayment mismatches, especially for depreciating assets like vehicles whose value drops faster than the loan is paid off. Aligning loan repayment schedules with income cycles and considering alternatives such as family support or chamas can help borrowers avoid unnecessary financial stress.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.