Understanding Credit Scores

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[dropcap]C[/dropcap]redit scores are not popular in Nigeria yet.  The retail credit rating is still an emerging one in Nigeria and many parts of Africa.

The challenges facing the development of a strong rating industry for the banking industry in Nigeria and most parts of Africa revolve around low banking penetration and an even lower credit penetration. The retail loan segment for the banking industry is usually low for many banks, in many cases making up less than 10% of the loan book.

Retail loan penetration is also hindered a poor population database system in many countries in Africa. Nigeria, for example, do not have a comprehensive population identification system, making it difficult for banks to adequately guide against the risk of lending to individuals.

The Central Bank of Nigeria (CBN) is making efforts to remedy this deficient identification system with the recent efforts to carry out a biometric system for all bank customers in Nigeria. This is expected to eliminate the challenge of identifying bank customers and consequently reduce the risk of retail bank lending.

Increased retail lending in Nigeria and across Africa will increase the relevance of credit scores, so it is important that everyone get to understand what credit scores is all about.

In developed countries where credit scores are very important, not having a sound credit score can come with huge cost. A low score can mean not getting a loan, paying a higher interest rate or even result in your not having a roof over your head.

Credit scores are generally influenced by five factors. These are : payment history, amount owed, length of credit history,  newly opened credit accounts, and types of credit used.

In Nigeria, where credit scores are relatively new, factors that will determine your credit score will include additional factors, like income level, marital status, spouse income, number of children and ownership or non-ownership of place of residence.

Most banks currently have an in-house credit scores that is used for the purpose of ranking retail customers seeking loans.