In very developed countries, there are certain cases where persons taking loan from banks, use the term “Credit score” in the course of transaction and communication. However, here in Nigeria, it isn’t regarded as part of our daily or usual term of communication. In this article, a proper examination of what credit score is, how it works, and how it affects your loan application will be done.
Brief Overview Of a Credit Score
What is a credit score? A credit score (using the VantageScoring model), is a 3-digit number ranging from 300 to 850 that indicates the level of risk associated with granting credit or loan to a prospective borrower or customer. More so, the lower your credit score is, the higher the risks and chances that the you may default in payment, and vice versa. The scores are in the hierarchy: excellent, good, average, or poor. In conclusion, your credit score is a representation of their creditworthiness.
Below is scales of measurement for credit score;
- 720 and above: Excellent credit
- 690-719: Good credit
- 630-689: Fair credit
- 300-629: Bad credit
Creditors often use the credit score for various risk assessment purposes ranging from market expansion, pre-qualification of customers, to credit evaluation.
Good vs Bad Credit Score
A track record of punctually making all credit payments, clearing debt balance, and taking justified loans, attributes to having a good credit score. Any credit score having credit utilization below 30% is considered a good score. On the other hand, 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.
Importance Of Having a Good Credit Score
- Ability 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 applicants creditworthiness.
- Secure higher credit limits on credit cards: Even though credit cards are not so widely used, they can still be acquired in Nigeria. Recently, they are majorly acquired on special requests from banks. A good credit score indicates creditworthiness and it can take be taken advantage of, in the form of higher credit limits on your cards.
- Furthermore, 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, cashback, complimentary movie tickets, discounts at luxury dining restaurants and hotels, travel miles, and much more.
- A good credit score will increase the chances of being able to get pre-approved loans at low-interest rates from banks and financial institutions.
Factors That Impact Credit Score
- Outstanding debts or accumulated debts can greatly weaken your credit score, In the same vein, paying up your debts late can also be of negative impact on creditworthiness.
- It is essential to manage how often you apply for credit because If you apply too many times, it can further weaken your score. Space out your loan applications to avoid this.
- When traveling out of Nigeria, your bank may issue you a credit card. Be sure to use it wisely and within limits. using the credit card within limits and ensuring timely payment of the bills will positively impact your credit score.
- Regularly checking your credit score helps to know how well or how terribly you are doing at managing credit, as it can also help you to identify any inaccurate or incorrect information and rectify it.
Checking Your Credit Score
Every Nigerian is entitled to one free Credit report every year from any registered Nigerian Credit Bureau, hence 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. Read about ALAT USSD Code and how to use them
- Get a free credit report from Nigeria’s first independent licensed credit bureau. You only get one free report per month.
Access To A Person’s Credit Score
Fortunately, not all can access your credit score. In fact, only a short list of entities can access your credit report, and these people or organizations must have what is known as a “permissible purpose”. such purposes are as follows;
- An applicant or a guarantor for credit
- 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
- Debt collection, enforcement of a monetary judgment, or enforcement of any other debt
- 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
People who can access a person’s credit score 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 installment payment basis
- Entities that in their ordinary course of business have relevant information that complies with Permissible Purposes
- CBN’s CRMS.
Effect of Credit Scores on Loan Applications
Credit scores surely have an effect your application for a loan, as this is the first thing lenders will look out for when considering your loan application.
This is why it is particularly important to pay attention to one’s credit report, as It determines whether lenders and creditors will do business with them and how good of an interest rate they get on financial products.