Want to take out a loan, but don’t know much about credit? Don’t worry you’re not alone. Like many Nigerians across the nation, you might know the word ‘Credit’ better as airtime. No worries though here’s an in-depth guide to credit in Nigeria and how to improve it.
What is Credit?
Credit refers to your capacity to borrow money, get an approved loan or other forms of financing with the understanding that you’ll pay later.
Businesses, banks and loaners grant you credit based on their assurance you can be trusted to pay back what you borrowed, along with any charges or interest rates applied.
There are two important C’s when it comes to credit; Capacity & Character.
Character refers specifically to your credit history i.e. your reputation or track record for repaying debts. This information appears on your credit reports.
Capacity is a measure of your ability to repay a loan by comparing your income against recurring debts hence, assessing your debt-to-income (DTI) ratio.
Credit Scoring In Nigeria
A credit score is a numerical representation of your ‘creditworthiness’ that is based on an analysis of your credit history. This information is typically sourced from credit bureaus.
Lenders, such as banks, use credit scores to estimate the possible risk posed by lending you money.
How to Improve Your Credit Score
- Check Your Credit Report — Improving your credit score begins with your credit report. Your credit report contains information on your income, current loans and how frequently you pay your debts off. If you would like to check your credit report you can request a free copy of your credit report from Credit Bureau.
- Pay off your debts — Use your credit report to make a list of your accounts and check your recent statements to find out how much you owe and the interest rates they are charging you. When you’re done with that, you can come up with a payment plan and start paying off your debts one by one, starting with the one with the highest interest.
- Setup Payment Reminders — Making your loan payments on time is one of the most important factors to your credit scores. Credit scores show your spending habits and to improve your credit score, you have to show that you make a habit out of paying your debts on time. To help, some banks offer payment reminders through their online banking portals that send you an email or text message when a payment is due. You should also consider enrolling in automatic payments through your loan providers to have payments automatically debited from your bank account.
How to Build Your Credit Score
What if you’ve never taken a loan before? Does that give you a good credit score? Not necessarily. Because you have no history with credit, you’re likely to have an empty credit file. This makes it difficult for lenders to assess if you are eligible for a loan or not. In layman terms, without adequate credit information about you, they cannot trust you will payback. With no credit history, you might still be able to get loans but they will most likely be very low so as to reduce risk.
So what can you do this to remedy this? Taking new loans responsibly and paying them off on time will fill your credit file and in turn, raise your credit score.
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