Mr Babs Ogundeyi, Founder and CEO of Kudi Capital Management, recently wrote an article about the importance of trust in borrowing and lending. In it, he states, “It is baffling how many [Nigerians] remain unaware of [borrowing’s] potential impact on their lives and businesses. This is obvious in the way [people] manage… personal finances”
He says there is much confusion among Nigerians about the process of accessing credit, and little understanding of how it can enhance one’s life and livelihood.
Taking our cue from Mr Ogundeyi, we decided to highlight some of the most stubborn myths about credit, debt and borrowing. Let’s set the record straight.
We all know at least one person who completely avoids debt. They pay for everything with cash or on debit cards and maybe they have a negative opinion of the whole concept of debt.
But it’s critical to remember that debt in itself is not a bad or good thing. It is a tool, like a car: it can be used to help us enhance our lives. But take your car out at 180 kph down a poorly paved road and you’ll soon have trouble.
Credit can also help us buy the things we need and free up money for other uses. But much like a car, misuse of credit can have unfavourable results.
Debt is sometimes used for necessary but expensive purchases, such as that car. Sometimes we need to take on debt to help us with cash flow shortages.
Other times we access debt to achieve an important goal, such as gaining an advanced degree or funding a new business.
The key is to borrow within your means and make sure your future earnings can be used to repay your debts in a timely manner.
“Even if you have defaulted, you can still rebuild your credit profile and get better rates in future.”
Closing old credit accounts does not boost your credit score. In fact, closing a credit card does two things that ‘ding’ your score down. First, it shortens the length of your credit history. A longer credit history benefits your score by demonstrating that you’ve been able to manage your borrowing for a long period of time.
The other effect of closing old records is that it reduces the total amount of credit available to you. This, in turn, can cause your “utilization rate” to rise. Your utilization rate shows how much you’re using in available credit: if you have ₦ 1 000 000 in available credit and you are using ₦ 200 000, your utilization rate is 20%.
The higher this percentage, the lower your score.
Consider the following instead: keep the account active (opened) and keep your use of it low. This is a good credit tactic that can consistently earn you a higher score!
There are actually many different methods of credit ‘scoring’ around the world, and even in Nigeria. Here, most lenders utilize SMARTScore, the scoring model developed by CreditRegistry based on Nigerian payment history data.
Lenders can also use customised credit scoring systems that match their particular business models. Some lenders even have a different credit scoring formula to assess borrower suitability for different products.
If you’re concerned about how to possibly manage your credit score with so many models, don’t worry. Most models consider the same basic factors, and if you have a great score in one model, you’ll likely have a good score on many others.
There’s a misconception that a complete absence of any borrowing activity will help one build a healthy financial credit profile. This is false!
Never using credit leaves lenders sceptical because they have no information on which to gauge your creditworthiness. It’s like never taking an exam in school: there is no way to prove your ability and thus no way to progress further into your education.
On the other hand, experience and practice with borrowing allow you to prove your fiscal responsibility and maturity with credit.
This one is very stubborn, but there is no truth to it at all.
Building a credit score takes time, and your ability to access credit may be limited until you develop a strong credit history, but no one is precluded from doing so.
Even if you have defaulted, you can still rebuild your credit profile and get better scores and lower lending rates in the future.
Again, this will take time. But it is completely within your ability to improve your creditworthiness and learn how to manage credit to your benefit!
Do you have questions about credit? Share them in the comments! or connect with us on our contact us page to share your thought.
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