A credit score is a quantitative estimate of your creditworthiness based on your payback history, which influences your credit history.
Credit scores in Nigeria generally range from between 300-850 whereby the highest credit score denotes lower default risk.
Importance Of Credit Scores In Nigeria
Credit scores in Nigeria holds significance to both individuals and institutions in that they provide;
1. Credit Access: Credit scores play a major role in the determination of loan approvals by credit institutions.
2. Loan Terms: The reliance on credit scores by lenders in Nigeria to perform risk assessments when making lending decisions ultimately determines your loan terms in regards to credit limits, repayment periods and interest rates.
3. Financial Opportunities: Credit scores influence various financial opportunities such as potential employment and business opportunities.
4. Trust & Credibility: Credit scores demonstrate an individual’s financial behavior in relation to honoring financial obligations.
5. Financial Discipline: Credit scores tend to influence financial discipline by providing awareness towards an individual’s financial habits.
Benefits Of Having A Good Credit Score In Nigeria
1. Access to credit: Higher credit scores provide higher chances of loan approvals by financial institutions.
2. Favorable loan terms: Loan terms that are more favorable may include lower interest rates, longer payback terms, and bigger credit ceilings.
3. Access to financial opportunities: High credit scores increase the chances of landing business deals or employment opportunities.
4. Builds trust & credibility: High credit scores build trust between you and the lender by demonstrating responsible financial behavior that may result in future competitive loan terms.
5. Promotes financial discipline: High credit scores indicate good financial planning, management and further promotes awareness of your financial habits that may lead to improved financial well-being.
Steps To Improve Credit Score In Nigeria
Improving your credit scores in Nigeria requires consistent effort and responsible financial habits listed below;
1. Review credit report: A credit report is a detailed account of a person’s credit history and financial behavior that is maintained by Nigerian credit bureaus.
This report usually contains various aspects of a borrower’s information relating to personal information such as credit accounts, payment history, public records, inquiries, credit scores etc
Occasionally, credit scores may contain inaccuracies and discrepancies that may impact overall credit scores and as such they need to be reviewed and promptly corrected.
2.Timely payments: Late/missed payments can negatively impact your credit score thus it is advisable to keep up-to date with all repayments including loans, credit card bills, utility bills etc
3. Debt reduction: High debt levels may result in lower credit scores and as such need to be minimized through any of the available debt management strategies such as debt prioritization or debt consolidation.
4. Avoid new credit applications: Numerous multiple credit applications may temporarily lower your credit score since it can raise risk concerns among lenders regarding your high debt affinity.
5. Credit mix balance: Maintain and responsibly manage various types of debt such as credit cards, loans etc to diversify your credit portfolio and positively impact your credit score.
6. Communicate with creditors: Late/missed payments as a result of financial constraints can severely damage your credit score and fundamentally, it is advisable to seek temporary relief from your creditors through favorable loan restructuring agreements.
How To Calculate Credit Score In Nigeria
Calculating your credit score in Nigeria involves a complex process carried out by Nigerian credit bureaus. The process usually considers crucial factors namely;
1. Payment history: refers to the consistency of meeting financial obligations in relation to on-time/late/missed payments.
2. Credit utilization: relates to how much credit has been consumed.
3. Credit mix: refers to diverse credit portfolio containing credit cards, loans, mortgages etc
4. Amount owed: refers to the loan balance amount available in your credit account
5. New credit: refers to the number of credit applications/inquiries made
6. Length of credit history: refers to the duration of your credit history in terms of loan applications, repayments etc
The above factors are carefully weighed to determine a 3-digit number which ultimately represents your credit score. However, the exact calculation methodology may vary depending on the credit score calculation model applied.
Credit Score Calculation Models In Nigeria
In general, there exists two (2) popular credit score models which include:
a) Vantage Score
Vantage score is the result of a collaboration between three 93) credit bureaus namely: Equifax, Experian and Transunion.
Vantage score uses 6 categories of information available in your credit report to describe their influence level on your final credit score. The ranking of influence among the credit score factors are;
1. Payment history (extremely influential)
2. Credit utilization (highly influential)
3. Credit mix & history length (highly influential)
4. Owed amounts (moderately influential)
5. New credit (less influential)
b) FICO Score
FICO score is the creation of a company known as Fair Isaac Corp in 1980 that uses five categories of credit report factors and assigns percentages as per their contribution to the overall credit scores.
The percentages given to each credit score factors include;
1. Payment history – 35%
2. Owed amounts – 30%
3. Length of credit history – 15%
4. Credit mix – 10%
5. New credit – 10%
While both credit scoring models are beneficial in their own capacities, the FICO score is the brand mostly adopted by lenders in Nigeria in the calculation of credit scores.
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