Why you should know your credit score

If you are in business or planning to set up one that will require some form of financing from other people, credit score is one of the things you should pay special attention to.

A credit score in the technical sense is used to describe a three-digit number generated by a mathematical algorithm using data or information supplied by a user’s credit report. In simple terms, it relates to the possibility of repaying the money you borrowed either for business or personal use.

Credit scores are often designed by credit bureaus to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 hours after scoring.

A credit bureau is an agency that collects and maintains individual credit information and sells it to lenders, creditors, and consumers in the form of a credit report.

Nigeria presently has three credit bureaus licensed in 2008 by the Central Bank of Nigeria (CBN): These include CRC Credit Bureau Limited; CR Services Credit Bureau Plc and XDS Credit Bureau Limited.

The importance of credit scores is underscored by a recent study by the CBN – the Financial Inclusion Report – which disclosed that only 1.8 per cent of the country’s adult population borrowed or paid back a loan through a formal institution in 2016. That abysmal number is part of the reason most Nigerian banks are unable to lend to small businesses or even individuals.

Although the ‘customer is king’ defines many banks’ business approach, there is the shareholders and investors who demand accountability and therefore reserves major priority in the way banks lend their money to any business. Until the coming of credit bureaus majority of the banks used to shy away from lending to small business whom they consider high risk. The need to grow the economy and drive for financial inclusion by the CBN has however seen a number of the bank engage the services of credit bureaus.

Banks are not the only financial institutions engaging credit bureaus and paying more attention to credit scores. Most non-bank credit firms are making their lending decision based on credit scores.

To derive a credit report, the bureau compiles information on individuals and business entities regarding their credits and repayment. It then creates a comprehensive credit record that may be made available to lending institutions and other users.

The primary users of credit information report include creditors, such as banks, mortgage finance companies, leasing agencies, insurance companies, micro-finance and SME lenders, asset management companies and other businesses that provide services to consumers on credit, including landlords, telecom and utility service providers.

A good credit score comes with many benefits. First it helps a financial institution decide whether to give you a loan or deny the application. A very good credit score could save you a lot of money in interest rate reduction.

In terms of getting finance for your business, your credit score helps lenders determine whether or not you qualify for a loan and how good the terms of the loan will be. Other benefits include ability to obtain credit without collateral or with reduced collateral; ability to acquire capital intensive items such as houses, cars and household goods without saving up for extended periods to pay cash and earning a reputation of being a responsible person.

To build a good credit score you can start by settling your outstanding debts. Nothing hurts your credit score like piling up debt. It is also important to ensure that you do not take too long to clear old debts. The number and severity of late payments can downgrade your score.

Also ensure you are forthright with information concerning your credit history. Do not try to fabricate or eliminate old debts from the information you provide. It could make you look dishonest and therefore a high risk. Leave old debt and good accounts on as long as possible.

Public records such as bankruptcy, criminal and civil judgments or tax problems should be clearly addressed before you apply for a loan. However, if you already have a criminal or civil record for instance, hiding from the information you are going to give could hurt your score badly.

Finally, do not ask for more than you need. Take credit responsibly.