Credit score: How loan apps determine the amount to lend you

Gone are the days when we stroll into the bank to apply for a small loan to solve financial issues. Loan apps are here to save the day; no need for the long application process. All you need to do is provide some personal information and get your loan.

However, with the increasing number of loan apps in Nigeria, we are beginning to have even more defaulters, probably because many people are unaware that despite the phone calls and debt-shaming messages, defaulting on loans can affect your credit score.

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What is a credit score?

This is a 3 -digit number ranging from 300 to 850 that represents a person’s creditworthiness based on their credit history. Creditworthiness is the extent to which a person is considered suitable to receive financial credit, often based on their reliability in paying money back in the past. Your credit score is important because it can impact a person’s ability to obtain loans, credit cards, rent repayments, insurance, and favourable interest rates.

Lenders, such as banks and credit card companies, use it to determine the likelihood of a borrower repaying their debts on time. So, the lower it is, the higher the risk of the borrower defaulting on payment.

Credit scores are based on various factors, including payment history, credit utilization, length of credit history, types of credit used, and new credit inquiries. The scores are often ranked as excellent, good, average, or poor.

• 720 and above Excellent credit
• 690-719: Good credit
• 630-689: Fair/Average credit
• 300-629: Bad credit

Credit score VS Credit report

A credit report is a statement with all the information about your credit activity and current credit situation, such as loan paying history and the status of your credit accounts. Imagine a bank statement for loan collection and repayment; that is what a credit report is.

A credit score is a calculation based on the information in your credit report. When applying for loans, most lenders focus on your credit score – a three-digit number more than the credit report- because it summarises your credit situation.

Does everyone have a credit score?

Well, not everybody has a credit score. There are a few ways to start building your credit score: obtaining a credit card from your bank (which is not very common in Nigeria) or taking out loans. You might not have a credit history if you have not engaged in these two.

So, you might wonder if having a credit score is important. It is. Not having one can prevent you from qualifying for loans and credit cards. It can even complicate your ability to rent cars and buy phones on credit. Establishing credit as early as possible is advisable as it is a good way to set yourself up for the future.

I don’t mean to go about borrowing money now, and then, you can take out a small loan that you can easily pay back to build your credit score. It is also important to note that this score is not SOLELY based on how much you make or how much is in your bank account but on how diligent you were in repaying these loans.

Read Also: “Stop providing payment services to loan sharks”- Nigerian Government orders fintech players

How loan apps determine your loan application

Loan apps typically use credit scores as one of the key factors in determining whether to approve a loan application. They use it to assess your ability to repay a loan and determine the interest rate you are eligible for.

This is one major spot lenders try to be very clear about, especially when considering loan applications. Although for first-time loan borrowers, it is an opportunity to build their credit score.

A high score indicates that you are a low-risk borrower and may qualify you for lower interest rates, while a low score may result in higher interest rates or even a loan denial.

While checking your credit score, some loan apps consider other factors such as your income, employment history, and debt-to-income ratio when evaluating loan applications. Although it is important to remember that each loan app may have specific criteria for approving loans, it is essential to read its terms and conditions before applying.

Factors that can affect your credit score

Accumulating debts: Having outstanding loan debts or repaying late can affect your score and reduce it, negatively impacting your creditworthiness.

Inconsistent credit score checking: It is important to consistently check your score to know when it is getting low and if some inaccurate information is affecting it.

How to check your credit score

Now that you understand what a credit score is, as a loan borrower or a credit card holder, you might consider checking your credit score to know your stance and ranking on the score chart. Some platforms provide you with the opportunity to check your credit score.