Our society is very young, credit-wise. And thus, new entrants to the borrowing /lending industry may be confused over the use of terms and languages, yet even amongst people who have successfully borrowed and repaid in prior times, there is still a mass ignorance of the factors affecting credit and availability of credit to a person, or organization.
What is the Credit Score?
The credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual.
It is usually a 3-digit number, ranging from 300 to 850 (using the VantageScoring model), indicating the risk level associated with granting credit or loan to a prospective borrower or customer. It is often important to know your credit score for important loan decision-making.
The lower it is, the higher the risk and shows that there is a high chance that the customer may default on payment and vice versa. The scores are ranked as excellent, good, average or poor. Thus, we can simply explain it to be a numerical index of a borrower’s creditworthiness.
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A credit score is primarily based on a credit report, information typically sourced from credit bureaus.
How is the Credit Score Calculated?
Credit scores estimate your likelihood of repaying new debt. Scores of 690 or above are considered good credit.
Your credit score is based on the following six under-listed factors:
- Payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. Payments made over 30 days late will typically be reported by your lender and hurt your credit scores. How far behind you are on a bill payment, the number of accounts that show late payments and whether you’ve brought the accounts current are all factors. The higher your proportion of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your score.
- Debt Profile: loans and credit cards make up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.
- Available Length of Your Credit History: accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be. Credit scoring models generally look at the average age of your credit when factoring in credit history. This is why you should consider keeping your accounts open and active. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.
- Types of Accounts Held: This is made up 10% of your score. Having a mix of accounts, including instalment loans, home loans, and retail and credit cards may help improve your score.
- Recent Credit Activities: This factor makes up the final 10%. If you’ve opened a lot of accounts recently or applied to open accounts, it may suggest potential financial trouble and may lower your score. However, credit scoring models are also built to recognize that consumers who are shopping for a loan aren’t necessarily extra risky.
- Used Credit vs. Available Credit: Lenders and creditors look at how much of your available credit – the “credit limit” – you are using. Lenders and creditors like to see that you are responsibly able to use credit and pay it off, regularly. If you have a mix of credit accounts that are “maxed out” or at their limit, that may impact credit scores.
Credit Worthiness Scales/Range;
- A score of 720 or higher is generally considered excellent credit.
- A score between 690 and 719 is considered good credit.
- Scores between 630 and 689 are fair credit.
- And scores of 629 or below are poor credit.
Lenders and creditors often use the credit score for various risk assessment purposes ranging from market expansion, and pre-qualification of customers, to credit evaluation.
What does it mean to have a good or bad credit score?
A Good Credit Score: this basically means that the borrower has a track record of making all credit payments on time, clearing debt balance, and taking justified loans will have a good credit score. Any credit score which has credit utilization below 30% is considered a good score, while
A Bad Credit Score: generally falls below 630 on a scale of 300-850 for the most common scoring models, FICO and VantageScore. Scores of 630 to 689 are considered fair credit and show that the borrower has a bad record or has defaulted or is defaulting.
Why do I Need a Good Credit Score?
- Without a good Credit Score, you may not be able to apply for low-interest loans, car loans, home loans, and other personal loans from lenders as they first check their credit scores to determine their creditworthiness.
- It will grant you access to secure higher credit limits on credit cards: Although they are not so common or widely used, credit cards can be gotten in Nigeria, but in recent times, they were majorly acquired on special requests from your bank. A good credit score is an indicator of your creditworthiness and you can take advantage of that in the form of higher credit limits on your cards.
- Enables your access to highly rated credit cards: Several financial institutions offer best-rewarding credit cards to customers with good credit scores. These cards often come with certain privileges in the form of discounts on different online shopping platforms, cash back, complimentary movie tickets, discounts at luxury dining restaurants and hotels, travel miles, and much more.
- Eligible for a pre-approved loan offer: A good credit score will increase your chances of being able to get pre-approved loans at low-interest rates from banks and financial institutions.
What are the factors that have an impact on my credit score?
- Debt Accumulation: Outstanding debts severely weaken your credit score as does late or defaulted debt payment.
- Constant Credit Applications: it is essential to manage how often you apply for credit. If you apply too many times, you can further weaken your score. Spacing the length of time between your applications can help reduce or avoid this.
- Credit Outlook: When you receive a credit card from your bank, it is most advisable you utilize it with the utmost discretion, within limits. Using the credit card within limits and ensuring timely payment of the bills will positively impact your credit score.
- Check your credit score regularly: This helps to know how well or how terribly you are doing at managing your credit. It can also help you to identify any inaccurate or incorrect information and rectify it.
How Can I check my Credit Score?
As a Nigerian, you are entitled to one free Credit report every year from any registered Nigerian Credit Bureau. To get a free credit report in Nigeria, use any of the following sources:
- Dial the USSD code *565*8# on your mobile phone to get instant Credit reports from CRC Credit Bureau. This service is currently available to MTN subscribers only.
- Get a free credit report from Nigeria’s first independent licensed credit bureau. You only get one free report per month.
How Can I Improve my Credit Score?
The factors that go into your score point out ways to build up your score:
- Timely payment of bills.
- Keep credit card balances under 30% of their limits, and ideally much lower.
- Keep older credit cards open to protect the average age of your accounts, and consider having a mix of credit cards and instalment loans. Space out credit applications instead of applying for a lot in a short time.
Who can have access to my Credit Score?
A credit Score can be requested from the following parties:
- An applicant or a guarantor for credit
- Debt collection, enforcement of a monetary judgment or enforcement of any other debt
- Review, renew, restructure or monitor credits
- Employment checks, Prospective tenants
- Underwrite, review, or renew insurance policies or analyze insurance claims
- Application for credit contracts or other post-paid services
- Carry out KYC checks on any person for any permissible purposes
- Directive of a regulatory authority or a public body
- Compliance with a court order
Institutions that may require, request and receive credit scores include;
- Banks, specialized banks and other financial institutions
- Leasing companies
- Insurance companies
- Cooperative societies and institutions that offer credit to SMEs
- Utility companies including electricity, telecommunications and water corporations
- Asset management companies
- Suppliers of goods and services on a post-paid, deferred or instalment payment basis
- Entities that in their ordinary course of business have relevant information that complies with Permissible Purposes
- CBN’s CRMS.
What Impact does my Credit Score Have?
Lenders particularly seek and consider your Credit Score before making your credit decision. This is why it is important to pay attention to your credit report. It determines whether lenders and creditors will lend to you or not.