Until the recent proliferation of small-scale digital loan services, the concept of credit was foreign to the average Nigerian. A greater population of the Nigerian public use only debit cards, while most have never applied for or used a credit card before.
In an article published by Vanguard, the new Nigerian government led by President Bola Ahmed Tinubu’s new administration is seeking novel ways to turn the situation around. Among the notable proposals is the introduction of a credit culture to stimulate the Nigerian economy. With proper execution, Nigeria's economy has the potential to witness substantial growth and advancement across multiple sectors, ultimately resulting in an enhanced quality of life for its citizens.
This means that having a thorough understanding of the credit system is very important as the Nigerian financial system continues to grow. Also, the Nigerian populace will need a re-orientation of credit to drive the adoption of the policies of the new administration.
To do this, we’ll begin with understanding some basic concepts:
What is credit?
Investopediadefines credit as “A contract agreement in which a borrower receives a sum of money or something of value and repays the lender at a later date, generally with interest”. Some examples of credit include; personal loans, car loans, and mortgages.
The credit system allows borrowers to be able to access credit (or more generally, loans) whenever they need money to cater for unplanned expenses or personal aspirations. However, the system can easily spiral out of control where there are no checks and balances between lenders and borrowers because borrowers can default, borrow from multiple lenders simultaneously, and other possible challenges.
One tool for managing this is a credit score.
What is a credit score?
As the name implies, a credit score is a numerical rating indicating the level of risk associated with lending to a borrower. In simple terms, a bad credit score signifies it is riskier to lend to that borrower while a good credit score signifies less risk.
In essence, credit scores attempt to predict the likelihood of a borrower to repay a debt.
A credit score is usually a 3-digit number with different ranges based on the model used in calculating it. A popular model is the FICO® model which ranges from 300-850 but individual credit bureaus may have their proprietary ways of calculating credit scores.
A breakdown of FICO credit score ranges is shown below:
Benefits of having a good credit score
1. Easy access to credit
Lenders consider a higher credit score as an indication of your creditworthiness and are more inclined to give you loans, credit cards, and other forms of credit.
2. Higher credit limits
With a good credit score, you can easily apply for and get higher credit limits from lenders. This can increase your financial flexibility and purchasing power to be able to handle more financially tasking endeavors.
3. Improved loan terms
You can negotiate better loan terms such as lower interest rates and longer repayment periods when you have a good credit score. With this, you can save money over time.
4. Higher chances of loan approvals
There is a higher chance of securing loan approvals for even mortgages and business loans.
5. Negotiating power
A good credit score can bring better negotiating power when dealing with financial institutions. You can leverage your positive credit history to secure better terms, rates, or rewards on credit cards, loans, or other financial products.
Essential tips for building a good credit score
Two important aspects to consider about building a good credit score are: repaying debts on time and using available credit. This will guide you in implementing various tips as you build your credit score.
1. Know and understand your credit report
There is no way to know your current stand credit-wise without a credit report. You can get your credit report in Nigeria through any authorized credit bureau. You may also be able to get your credit report from your financial institutions (in partnership with registered credit bureaus).
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2. Review your credit report
Review your credit report for any issues that could affect your credit score. This includes issues like unauthorized activity, unpaid bills, and incorrect personal information. Make conscious attempts to resolve them as soon as possible.
3. Repay your loans on time
A common metric for calculating credit scores is your credit history and how you paid previous loans and lines of credit.
Paying your loans on time shows the lender that you’re trustworthy and can be entrusted with greater credit limits in the future. One easy way to do this is to set up an auto-debit from your bank account to pay off your credit bills at the end of the month.
4. Use available credit
Let’s say your bank issues you a credit card with a ₦250,000 limit and for the past year you have barely used ₦35,000. Credit lenders are not inclined to provide credit for people who don’t use it because that’s a lot of locked-up money with no use.
Now this does not mean you must max out all available credit every time, but consistent use of the credit and repayments shows the lender that you are using their product (and generating revenue for them).
Hence, they are likely to increase your limit or the ability for you to use more credit.
In conclusion, as Nigeria’s credit system continues to improve, building a good credit score early will help you enjoy the benefits of having good credit. To build a good credit score in Nigeria, you have to first get your credit report through an authorized credit bureau.
With the information in this article, you can plan how to improve your credit score. Ensure to pay all credit on time and use available credit more consistently. Avoid late or missed payments as this can seriously impact your score.
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