Creditworthiness Analysis: How to Calculate Credit Score in Nigeria
Creditworthiness is a sort of photograph of the economic and financial health of those who go to apply for a loan or a mortgage. It is a value that identifies every Nigerian’s reliability as payers and therefore will affect the rates that will be proposed to us in the negotiation. To understand, the worse this value is, the higher the interest rates proposed for the repayment of the loan.
It can also lead to rejection or a more contained loan proposal. For this reason, it is crucial to have an accurate creditworthiness analysis to have the best possible contractual conditions. The advantage of this tool is that, as we will see, it is useful both for the institutions that provide credit and for the person who goes to request money.
Simply put, creditworthiness, also called credit score, is a precise indicator that every bank or credit institution analyzes to understand the sustainability of our condition as debtors. Different financial companies may weigh various factors differently and therefore we may have different values.
How is it calculated?
The calculation of this value is a sort of question by the bank to these questions:
- Is there the potential for which the loan will be repaid?
- Will the installments be sustainable for the entire duration of the contract?
- Are there enough guarantees to protect the credit disbursed?
In practice, your credit score should be the summary that answers all these questions. One of the first things that are analyzed is definitely the flow of money over time. Having a permanent job with a high salary for years is certainly a very important merit factor. On the other hand, being precarious, unemployed, or having a variable salary in our history is a risk factor that leads to penalizing our ranking. Another factor is our assets and their resulting income. Having many properties and assets to be pledged is a protection for the lender against those who have nothing to put into play.
Surely the level of debt of the applicant is very important, after all, it makes little logical sense to go and take out credit against someone full of debts still outstanding. The history of solubility vis-à-vis previous commitments also plays a decisive role. If in the past you have been left with outstanding payments, your degree of reliability collapses, while if you have repaid your previous loans and mortgages at the right time and manner, you buy in confidence.
If, after a careful evaluation of all these variables, the lender assigns you an insufficient ranking to the request, the loan will be denied to you. In this case, the only solution is to try to contact another credit institution or decide to request a smaller loan or another credit instrument.
What are Ranking Values?
Based on the evaluation of all the aforementioned factors, the bank or credit institution will assign creditworthiness to the applicant with an evaluation expressed in letters. Below is the list of acronyms from best to worst:
- AAA = high security
- AA = security
- A = large creditworthiness
- BBB = solvency
- BB = vulnerability
- B = high vulnerability
- CCC = risk
- CC = high risk
- C = very high risk
Based on the acronym that we will have associated with our condition, it will be decided whether to make a contractual proposal and, if so, under what conditions.
Advantages of Credit Score
The advantages of using this mechanism are that loans are usually disbursed much faster, even sometimes on the day of the request. The contractual conditions are more equitable as financial intermediaries can focus exclusively on the cabbage of credit risk, already having a photograph of the economic and financial status of the applicant.
Creditworthiness gives a very precise and reliable indication of the future debtor and therefore banks are willing to grant more money being more aware of the extent of the risk they face.
As a result, interest rates will in most cases also be lower. It is also a concept that safeguards the entire financial ecosystem of the granting of liquidity. Having greater control over the quality of repayments allows you to have liquidity available that can be requested again. Bad management leads to unpaid payments that erode the capital that can be requested, also damaging applicants who have high merit characteristics.
A very underestimated aspect is also the protection of the person who will go to request the loan or mortgage. In fact, it may happen that he does not have adequate preparation and awareness, leading to requesting sums that are not sustainable from his economic-financial condition.
This, in addition to the bank, also brings damage to the applicant himself who will find himself with debts and foreclosed assets. A photograph of your situation, however painful in some cases, is a great lifesaver to avoid worsening it further. It also allows us to communicate with financial institutions in a more constructive way to find the tools that best suit our needs and the situation.