All You Need To Know About Your Credit Score: Having firsthand knowledge about your credit score can help you better understand your current credit position. With a good credit score, you are at an advantage when making finance moves, whether it is buying a home, starting a business, or getting a car loan.
What is a credit score?
According to Investopedia, a credit score is a number from 300 to 850 that rates a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.
A credit score is based on credit history, that is, the number of open accounts, total levels of debt, repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.
How do credit scores work?
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit.
For example, people with credit scores below 640 are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a higher rate than a conventional mortgage to compensate for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.
On the other hand, a credit score of 700 or higher is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent.
Who calculates credit scores?
There are several credit bureaus in Nigeria but only three are of major national significance. In 2008, the Central Bank of Nigeria granted credit bureau licenses to three private companies:
- CRC Bureau Credit Limited
- CR Services Credit Bureau PLC
- XDS Credit Bureau Limited
These licenses were granted in 2008. They eventually formed what is now regarded as The Credit Bureau Association of Nigeria in 2012. This trio dominates the market for collecting, analyzing, and disbursing information about consumers in the credit markets.
Functions of The Credit Bureau Association of Nigeria
The Credit Bureau Association of Nigeria (CBAN) is an incorporated not-for-profit and non-governmental business management organisation formed to promote a credit reporting culture towards the expansion of Nigeria’s economy through its values.
CBAN performs the following functions:
- Maintain a Database of Borrowers from Financial Institutions:
- Central Storage of Collected Information
- Provide Credit Information Upon Request
- Eliminate Information Discrepancy
- Increased Access to Credit
Since the advent of Credit Bureaus, however, it is relatively easier to access loans. The Bureau only provides a credit information report. Isn’t that awesome? Ideally, your footwear does not have to be pals with the banking hall before you can get a loan.
Why is your credit score important?
In the late 1980s and the early 1990s, the banking industry experienced a wave of financial distress. This was largely caused by predatory debtors who hopped from one bank to the other; neglecting their obligations.
A lot of borrowers abandoned their debt obligations from one Bank and then proceed to obtain yet another loan from a different Bank.
As a result of this, the Central Bank of Nigeria identified the need to establish a central database regulating this perversion.
This led to the setting up of credit bureaus which in turn led to the forming of CBAN.
Can you get a loan in Nigeria without a credit score?
It is possible to get a loan with no credit or bad credit, but lenders will likely charge you a higher interest rate than if you have an established credit history.
Poor credit history affects your reputation with your bank, and it may make it difficult for you to get a loan in the future.
Maintaining a good credit score is very important because the Central Bank of Nigeria is working on rules that will make it practically impossible for people with bad credit history to get loans.
How can you check your credit score?
Your credit score is reflective of how you have managed your financial obligations in the past. A 2-digit (10 – 99) score indicates a sparse borrowing history, while a 3-digit (100 – 999) score shows the credit bureau has more financial data on the borrower.
If your score is high your loan application is very likely to be approved.
nairaCompare has one of the best tools for checking your credit score. All you need to do is register on the website, enter the required details and wait for a report.
Other than that, every Nigerian is entitled to one free Credit report every year from any registered Nigerian Credit Bureau.
Why does your credit score reduce?
As a borrower, honouring your loan agreements is very important. Some of the actions that lead to a reduced credit score include;
- Paying bills late
- Not paying the minimum amount required
- Keeping debt levels too high
- Irregularities in financial documents
Despite having a bad credit score, it is possible for you to access loans. However, your credit score keeps you from getting a great Annual Percentage Rate. It is also possible for you to find interest rates that are much lower than those you’d likely find on payday loans.
How can you increase your credit score?
When information is updated on a borrower’s credit report, their credit score changes and can rise or fall based on new information.
That means, if your credit situation improves, your credit score will change as well.
Here are some ways that a consumer can improve their credit score:
Pay your bills on time
Six months of on-time payments are required to see a noticeable difference in your score. Your payment history accounts for about 35% of your credit Score. So, if you settle your bills in time, you can boost your credit score by up to 35 percent!
If you want to ensure that you’re never late when it comes to paying your bills, you can set up autopay or due-date alerts for loans.
Aim for less credit utilization
The second most essential factor in your credit score calculation is your credit utilization which accounts for about 30%. Credit utilization describes the portion of your credit limit that you use at any point in time. In other words, the amounts you owe make up 30% of your Score.
The easiest way to boost your Score using this medium is to ensure that your credit card balances are paid in full each month.
Limit your loan requests
If you want to focus on increasing your Score, you may want to delay any application for new loans for a while. Hard inquiries happen when a lender looks through your credit to evaluate if you qualify for a financial product.
These checks appear on your credit score, and each review may affect your credit score. Your credit score could be impacted because lenders could consider a greater credit risk when you attempt to borrow money from various sources.