What Are Credit Scores And Why Are They Important In Ghana?
Your credit score is one of the most important numbers in your life. It can determine whether you are able to get a loan, how much you will have to pay for that loan, and even whether you are approved for a credit card. Your credit score is also used by landlords, insurance companies, and employers when making decisions about extending services or products to you.
While your credit score is important, it’s just one factor that lenders will consider when making a lending decision. They will also look at things like your employment history, income, and debt-to-income ratio. In this article, we will break down what credit scores are and why they matter.
What Are Credit Scores And What Do They Represent?
Credit scores are numerical representations of an individual’s creditworthiness. In other words, they provide lenders with an indication of how likely a borrower is to repay their debt.
This is a three-digit number between 300 and 850, with a higher number indicating a lower risk of default. A high credit score means you’re a low-risk borrower, which could lead to lenders offering you lower interest rates on loans. A low credit score, on the other hand, could mean you’ll struggle to get approved for certain types of credit because you’re seen as a high-risk borrower.
How Are Credit Scores Calculated In Ghana?
There are a few different scoring models used by lenders, but the most common is the FICO score. This was created by the Fair Isaac Corporation in 1989 and is now used by over 90% of lenders when making credit decisions. The score ranges from 300 to 850.
Your FICO score is calculated using information from your credit report, which is a record of your credit history. This includes:
- Your credit type mix: This is the mix of different types of credit you have, such as credit cards, mortgages, and car loans.
- Your payment history: This is a record of whether you’ve made your payments on time.
- Your credit utilization: This is the amount of debt you have compared to your credit limit.
- Your current debt: This is the amount of money you owe on your outstanding debts.
- Your credit history: This is the length of time you’ve been using credit.
- Credit application frequency: This is how often you apply for new credit.
The credit bureau in Ghana will use the above factors to calculate your credit score and it is important o know them to help improve your credit rating.
Why Are Credit Scores Important In Ghana
Credit scores are important because they give lenders an indication of how likely you are to repay a loan. This is important for both the lender and the borrower.
- For the lender, it helps them to make an informed decision about whether or not to extend credit to a borrower. Every lender doesn’t want to end up in a situation where they are owed money that the borrower can’t repay. Credit scores to some extent help them to avoid that. They use it to ascertain the credit worthiness of a borrower.
- For the borrower, knowing your credit score helps you to know where you stand in the eyes of lenders. It also helps you to work on your credit score so that you can access loans at better terms in the future. A high credit score means you’re a low-risk borrower, which could lead to lenders offering you lower interest rates on loans.
Let’s look at some benefits of having a good credit score.
Benefits Of Having A Good Credit Score In Ghana
Having a good credit score has its benefits. Some of these benefits are:
1. You’re More Likely To Be Approved For A Loan
A good credit score indicates to lenders that you’re a low-risk borrower, which could lead to them approving your loan application. While this is not the only factor that lenders look at before approving a loan, it is an important one that they will definitely take into consideration.
2. You’re More Likely To Get A Lower Interest Rate
A good credit score could lead to lenders offering you a lower interest rate on your loan. This could save you money in the long run. While this doesn’t happen all the time, it is definitely something that could happen if you have a good credit score.
3. You’re More Likely To Get A Higher Credit Limit
A good credit score could lead to lenders giving you a higher credit limit. This can be helpful if you need to make a large purchase or have an emergency expense.
4. You’re More Likely To Get Approved For A Mortgage
A good credit score is important if you’re looking to buy a house. A high credit score will give you a better chance of getting approved for a mortgage. In other words, you have a very low chance of your mortgage application getting denied.
Consequences Of Having A Bad Credit Score In Ghana
While having a good credit score has its benefits, having a bad credit score also has its consequences. Some of these consequences are:
1. You’re More Likely To Be Denied A Loan
A bad credit score indicates to lenders that you’re a high-risk borrower, which could lead to them denying your loan application.
2. You’ll Pay Higher Interest Rates
If you’re approved for a loan with bad credit, you’ll likely have to pay higher interest rates. This is because lenders see you as a high-risk borrower and want to compensate themselves for that risk.
3. You Could Be Denied An Apartment
This is not a common practice in Ghana when looking for a place to rent but for a landlord who wants to know your financial history to see if you are likely to pay their rent on time, a bad credit score could lead to you being denied an apartment.
4. Your Car Insurance Rates Could Go Up
Many car insurance companies use your credit score to help determine your premium. So if you have a bad credit score, you could see your rates go up.
5. You May Have Trouble Getting A Job
Some employers use credit checks as part of their hiring process. So if you’re looking for a job and have bad credit, it could make it harder to get hired.
These are just some of the consequences of having a bad credit score. As you can see, it is very important to maintain a good credit score.
How To Improve Your Credit Score In Ghana
There are a few things you can do to help improve your credit score. Some of these things are:
1. Pay Your Bills On Time
This is one of the most important things you can do to improve your credit score. Payment history is one of the biggest factors that go into your credit score, so it’s important to make sure you’re always paying your bills on time.
2. Keep Your Balances Low
Another factor that goes into your credit score is your credit utilization ratio. This is the amount of debt you have compared to your credit limit. So if you have a high credit limit and low balances, it will help improve your credit score.
3. Don’t Close Old Accounts
Another factor that goes into your credit score is the length of your credit history. So if you have old accounts that are in good standing, don’t close them. This will help improve your credit score.
4. Refrain From Applying For Too Much New Credit
Every time you apply for new credit, it will show up on your credit report. If you have too many inquiries, it could lead to a lower credit score. So it’s best to refrain from applying for new credit unless you really need it.
5. Dispute Any Errors On Your Credit Report
If you find any errors on your credit report, it’s important to dispute them. This can help improve your credit score. Credit bureaus can make errors, so it’s always best to check your credit report periodically to make sure everything is accurate.
These are just some of the things you can do to help improve your credit score. If you have a bad credit score, it’s important to take action and try to improve it. A good credit score can benefit you in many ways, so it’s worth the effort.