Why Entry’s Credit Ratings Matter: Understanding the Importance of Credit Ratings

Investopedia states, “Few things in life follow you as your credit rating does...” but is this true across Africa? Do our credit scores matter?

Credit ratings are vitally important to the financial world, yet many people still need to comprehend their importance fully. Credit ratings evaluate a borrower’s ability to access loans. In this blog post, we’ll explore the importance of credit ratings and why they matter.

In simple terms, a credit rating help financial institutions understand how much they can lend you and how likely you are to pay the loan. Credit ratings traditionally are assigned based on various factors which include assets, expenses, income and loan history. This information is extrapolated from pay-slips, job security, job tenure, am amalgamation of lifestyle expenses like rent and vehicle maintenance and/or payments, previous loan history and big purchases on your balance sheet, land, house or equipment. In order to score you all of these things are observed and considered. A good rating is normally indicated by earning more than you spend month on month, having a sizeable asset base and a good history of paying back loans you’ve previously taken out. A bad credit rating is associated with spending more than you earn or close to that amount, having low value assets or no assets at all and a terrible track record of paying back loans in the past.

A good rating can make your life easier, a bad rating can make your life a living hell. In more developed economies good ratings give you access to mortgages, vehicle finance, unsecured personal credit and so much more. In fact it can even impact where you can rent a home, some landlords deny people from renting their home due to a bad credit history. You might wonder but rental contracts aren’t even loans? Well, the landlord my consider you a person who is bad with money based on your poor credit history and score and may deduce that you’ll probably be bad with rental payments. It’s clear that in more developed economies your credit score could affect multiple facets of your life.

The Importance of Credit Ratings: Why They Matter in Africa

Financial infrastructure is still in its infancy in Africa. Many people in have never even seen or had a credit score. The impact this may have on one’s life is seen in the most clearest way through interest rates. Across Africa most individuals that lack credit history or have poor credit scores often have to turn to loan sharks or high interest short term loans issued by micro-lending institutions. Micro-lending institutions justify this by citing that these people with no credit history or bad history are high risk and because of that they will charge a premium on the money. Take Zimbabwe for example, banks cannot exceed over 20% per anum in interest for USD loans as stated in our 2024 monetary policy. This rule does not apply to micro-lending institutions and they can charge as high as 20% per month, in some cases even more. This translates to as much as 240% per anum versus 20% or rather 20% per month versus 1.7% per month! This difference is more than substantial! Some would call this predatory yet over USD60 million a year is lent out to individuals and small businesses at such interest rates. Having a good credit score can literally save you from being exposed to over 220% more interest per year. Does that matter? I think we would all agree resoundingly that it does matter!

Whilst African financial infrastructure continues to develop individuals must arm themselves with the knowledge of the importance of a credit score and how it can impact their pockets and their day to day lives. Access to credit is meant to make ones life better not straddle them with debt and lead them down a path of poverty!

Stay knowledgeable stay financially woke!

1. Access to Loans

Credit ratings are used by lenders to assess the risk of lending money to borrowers. Higher credit ratings can make loan approval easier, whereas lower credit ratings can make loan approval more difficult, and sometimes even impossible.

This can have serious consequences for borrowers who need credit to make large purchases like a Home.

2. Interest Rates

Borrowers with better credit often get lower interest rates on loans. This can save them a lot of money for a loan. However, borrowers with lower credit ratings may be charged higher interest rates, resulting in more interest paid.

3. Help manage risk

Credit ratings are an important tool for risk management in the financial system. Credit ratings help lenders manage risk exposure and make informed investment decisions by assessing credit risk.

In summary, credit ratings matter because they can impact a borrower’s financial opportunities and stability. Maintaining a good credit rating can help borrowers access loans, secure better interest rates, and save money.