A credit score is a 3 digit number that plays an important role in determining your creditworthiness. You know the same way you use a debit card, that’s how a credit card works. However, with a credit card, you make purchases with the card and pay a fixed price at the end of every month. This score now shows how well you’ve been using your card, and if you’re worthy to be considered credible in terms of future loans.
Therefore, this article will give you a clear understanding of what a credit score is and how you can improve and maintain a good score.

What is a Credit Score

A credit score is a numerical digit that shows how responsible you’ve been with borrowing and repaying back money. This score helps lenders understand the risk of borrowing to you.

So it goes like this— the higher the score, the less likely it is that the borrower won’t pay back.
This score ranges from 300-850.

Additionally, with a higher score, there’s always a better chance of qualifying for loans with favorable terms.

The score goes like this:

• 300-499: Very poor.
• 500-600: Poor.
• 601-660: Fair.
• 661-780: Good.
• 781-850: Excellent.

However, it’s important to note that you can’t have a credit score if you have never used a credit product or service before.

Why Should you Care About This?

Now, if you’re into business, you know how necessary is it to have those extra funds that will help keep your work smooth and easy. Well, having a good credit score can open doors of financial opportunities. Let’s look at why it’s important.

1. Helps you save money

A good score makes it easier for borrowers to secure lower interest rates on loans and credit cards. This helps you to save more money.

2. Qualify for better deals

You know how you always love to borrow money to that friend who pays back at the due date and time?

Well, it’s the same way for lenders. If you have a good score, it helps lenders to assess your eligibility for loans. This helps you get better deals with lower interest rates.

How is your Credit Score Calculated?

A credit score is most widely calculated using the FICO score that takes into account the following.

Payment History

This is a very important factor to look at when trying to calculate your score. How often do you pay your bills? How reliable are you with paying back early? Your payment history comprises of 35% of your credit score calculation using the FICO method.

Additionally, if you pay back your bills on time, your payment history will help improve your score, if not, it’s going to affect your score negatively.

Credit Utilization

This is calculated by how much of your available credit that you’re using. It is calculated by dividing your total credit card balance by your total credit limit.

Also, it is advised to have a lower credit utilization rate as this shows lenders that you’re a responsible spender. This makes up 30% of your FICO score.

Length of Credit History

A longer credit history is a good thing when it comes to calculating your score. This indicates to credit Bureaus and lenders that you have a stable and responsible financial behavior.

Moreso, it suggests that you’ve been able to manage credit over a long period of time and therefore, makes it easier to get credit in the future. This makes up 15% of the FICO score.

Types of Credit Used

Having a mixture of these credits helps to improve your score. For instance, if you have a revolving credit like credit cards and installment credit like car loans and mortgages, it shows lenders that you can handle different types of credits responsibly.
This helps to increase your credit score.
It makes up 10% of the FICO score.

New Credit Inquiries

Frequently trying to get new credits can affect your score negatively. When you apply for a new credit card or loan, the lender pulls your credit report. This action is recorded as a hard inquiry.

Therefore, having too many hard inquiries will signal to lenders that you’re a risky borrower. Hence, it’s important to inquire for new credit only when it’s very necessary. This also accounts for 10% of the FICO score.

How to Check your Credit Score

The credit scoring system in Nigeria is managed by the Credit Bureau Association of Nigeria (CBAN). You can check your credit score for free through any of the credit bureaus in Nigeria.

Improving your Credit Score

There are a few ways to improve your credit score which includes making on time payments, paying down balances and avoiding unnecessary debt.

Therefore, whether you’re building your credit from scratch or trying to rebuild, here are few ways to improve your score in order to be seen as a low risk borrower.

1. Pay your bills on time—improve your credit score

Consistently paying your bills on time will help you increase your credit score. Set up automatic payments to avoid missing deadlines.

2. Lower your credit utilization ratio

Like we already said, a lower credit use significantly indicates to lenders that you’re a responsible borrower. Try to use less than 30% of your credit limit.

3. Don’t close old accounts

Keep your old accounts open and build a long credit history. This signifies to lenders that you’re responsible enough to handle finances. Leave it open even when you’re no longer using it.

4. Limit new credit applications

Too many credit applications can affect your score negatively. Therefore, it’s important to apply for new credits only when it’s necessary.

5. Dispute errors

If you find any inaccuracy on your credit report, report it immediately. Monitor your credit report and correct errors as soon as you see them.

6. Diversify your Credit Types

Having a mix of credit types shows lenders that you’re able to handle different types of credits. So you can have a mixture of credit cards, loans and mortgages.

How to Maintain a Healthy Credit Score

It’s one thing to improve your credit score and it’s another different thing to maintain it.
However, you can maintain a good score by preserving the habits you learnt while improving your credit scores.
This includes:

• Regularly reviewing your credit report—Always be on the look out for errors and unauthorized activity.
• Avoid excessive debt—if you want to maintain a good score, you need to learn to reduce your accumulation of debts as much as possible.
• Use credits responsibly— Use your credit cards for necessary purchases and pay it off in full each month.
• Always keep your credit utilization low— A value of less than 30% qualifies you as a responsible borrower.

Conclusion

Understanding your credit score is crucial for maintaining a good and responsible financial data. By following the tips outlined in this article, you can improve and maintain a good score, thereby unlocking better loan rates, credit approvals and financial opportunities.