How Credit Works

How Credit Works


  1. Trust and Creditworthiness: Basis of any credit agreement.
  2. Interest Rates: Determine the cost of borrowing.
  3. Diverse Credit Types: Cater to various financial needs.
  4. Economic Impact: Crucial for personal and national growth.
  5. Responsible Management: Key to financial stability.
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Understanding how credit works is crucial for anyone looking to navigate the financial landscape effectively. In Nigeria, as in many parts of the world, credit is a key component of financial management, both for individuals and businesses.

The Foundation of Credit

Credit is fundamentally based on trust. Lenders trust that borrowers will repay the borrowed amount within a specified period. This trust is quantified through credit scores, which assess a borrower’s creditworthiness based on their financial history.

Credit in Action

When you apply for credit, whether it’s a loan, credit card, or any other form, the lender evaluates your credit score and financial history. Based on this evaluation, they decide whether to extend credit to you and under what terms, including the interest rate and repayment schedule.

Interest Rates: The Cost of Borrowing

Interest rates are a critical aspect of how credit works. They represent the cost of borrowing money and are determined by several factors, including the lender’s assessment of the risk involved in lending to you. In Nigeria, interest rates can vary widely, influenced by factors like inflation, economic policies, and your creditworthiness.

Types of Credit Available

As previously discussed, there are several types of credit, including revolving credit, instalment credit, open credit, and service credit. Each serves different financial needs and situations.

  • Revolving Credit: Allows for flexible borrowing up to a certain limit.
  • Instalment Credit: Involves borrowing a fixed amount and repaying it over a set period.
  • Open Credit: Typically used for regular, variable expenses like utility bills.
  • Service Credit: Extends to services provided with payment expected at a later date.

Credit’s Role in the Economy

Credit fuels economic growth by enabling consumers to make purchases and invest in ways that wouldn’t be possible with cash alone. It also allows businesses to expand, innovate, and meet operational costs. In Nigeria, credit has been pivotal in supporting small and medium-sized enterprises (SMEs), which are crucial for the country’s economic development.

Managing Credit Responsibly

It’s essential to manage credit wisely by understanding the terms of credit agreements, maintaining a good credit score, and ensuring timely repayments. Mismanagement can lead to debt accumulation and financial difficulties.

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