A number used by lenders to determine how likely they are to be repaid is referred to as a credit score. It demonstrates a borrower’s debt history to a lender before the lender gives out their service on credit. Examples of such services include business loans, mortgages, insurance etc. Today, we are breaking it down to the basics so that the next time you hear the term, confusion will depart from you.
A credit score is basically a 3-digit number that ranges from 300 to 850. The most common type of credit score is the FICO score. A higher score will unlock better opportunities for a borrower while a lower score will restrict a borrower’s opportunities or increase their interest rates. Credit scores are grouped into 5 standard measures which are:
Excellent: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-699
Poor: 300- 579.
Credit scores are calculated from credit reports compiled by credit bureaus. In Nigeria, there are three certified bureaus; namely, CRC Credit Bureau Limited, CR Services Credit Bureau PLC and XDS Credit Bureau Limited. These bureaus report, update, and store consumers’ credit histories.
There are several factors that are evaluated when calculating a credit score. Some of them include:
Debt repayment history: This refers to how compliant you were to the agreed terms. Did you pay as at the agreed time or they had to chase you all around? It should ideally be over 35% although external factors like bankruptcy can affect the outcome.
Total amount owed: This takes into consideration the amount you owe in your account, the available credit, and the number of accounts with a balance. This rate is over 30%
Length of credit history: A longer credit history increases your credit score. If your credit history shows you’ve been building a credit history for a long time, it can work in your favour. However, you can get a good score if the rest of your report shows your credit responsibility. The rate is over 15%
Pursuit of new credit: If you have a recently opened credit account, the score will be weighed against the rest of the history. This rate is over 10%
Credit Mix: Credit cards, instalment loans and personal lines of credit can increase your score. Although slightly, half bread is better than none. The rate for this is over 10%
Knowing your credit score helps you take control of your finances and leaves you better equipped to apply for loans in Nigeria. You can never be financially over-prepared for Nigeria and that is why we recommend you check your credit score regularly using the Allawee app.
As always,
Allawee out!