A credit score in India plays a vital role in deciding your financial creditworthiness. However, there are various myths surrounding scores that often result in massive misunderstanding and confusion. Discussed here are the top myths surrounding credit scores along with their respective truths.
- Misconception: My credit score is the same across all credit bureaus.
Truth: Credit scores may vary across different credit bureaus. Each bureau has its own algorithm and data sources to calculate credit scores.
- Misconception: Checking my credit score will negatively impact it.
Truth: Checking your credit score for free every year through legitimate channels, such as Experian credit score site or CIBIL score site does not harm your score. It is considered a soft inquiry that does not affect your creditworthiness. Also, you may check free credit score through various online financial platforms monthly.
- Misconception: My score is decided as per the income I earn.
Truth: Your score depends on your financial behaviour and credit history, not on the income you earn. Factors such as timely bill payments, credit utilisation, and credit mix impact your credit score.
- Misconception: Closing old credit accounts will improve my credit score.
Truth: Closing old credit accounts can harm your credit score as it reduces your overall credit history and credit utilisation ratio.
- Misconception: My credit score will improve if I become an authorised user on someone else’s credit card.
Truth: While being an authorised user may help establish credit, it does not guarantee an improvement in your credit score. Your credit behaviour matters most.
- Misconception: I have a good credit score, so I don’t need to check it regularly.
Truth: Periodically assessing your score is important to figure out any potential fraud, discrepancies or mistakes that might affect your finances.
- Misconception: Repaying my dues after the end of the due date will not impact my score.
Truth: Paying your dues late can have an extremely negative impact on your score. Repaying your dues timely is necessary for maintaining an excellent credit standing.
- Misconception: Settling a debt will remove it from my credit report.
Truth: Settling a debt does not erase it from your credit report. It might be mentioned as “paid” or “settled”, but it stays on your credit record for a long time period.
- Misconception: My score is poor so I might not get a loan in the future.
Truth: Though a poor score might restrict your loan options or deals, there are a few lenders who may be willing to offer you a loan deal with a score of less than 750. However, such deals may be at the terms and conditions of the lenders, with no potential of yours to negotiate for a better deal. In short, you may even have to bear a higher rate of interest, which considerably enhances your overall loan cost.
- Misconception: I can ameliorate my score by availing more loan.
Truth: Increasing your debt burden can harm your credit score. It’s important to maintain a balanced credit utilisation ratio.
- Misconception: Only loans impact my credit score; credit cards have no effect.
Truth: Credit cards hold a considerable impact on your score. Discipline usage of credit cards can assist form a positive credit record.
- Misconception: Credit scores are only relevant for borrowing money.
Truth: Credit scores are not limited to loans. Landlords, insurance companies, and even employers may consider credit scores when evaluating applicants.
- Misconception: Once a negative item is removed from my credit report, my score will instantly improve.
Truth: While removing a negative item is beneficial, the impact on your credit score may take time as credit scoring models consider various factors.
- Misconception: I don’t have a credit history, so I have a perfect credit score.
Truth: Having zero credit history might lead to a non-existent or low score, making it extremely challenging to avail credit in the upcoming times.
- Misconception: I can enhance my score instantly through credit repair agencies.
Truth: Credit repair agencies cannot magically improve your credit score overnight. Building good credit takes time and responsible financial habits.
- Misconception: Paying off a loan early will decrease my credit score.
Truth: Paying off a loan early is generally viewed positively and reflects responsible financial behaviour. It is unlikely to harm your credit score.
- Misconception: Only wealthy individuals have high credit scores.
Truth: Your credit score is not determined by your wealth. It is based on your financial behaviour and responsible credit management.
- Misconception: My score will be impacted by the credit history of my spouse.
Truth: Your score stays independent of the credit history of your spouse. However, joint credit options might have an impact on both credit scores.
- Misconception: I do not require checking my score if I do not have any outstanding dues.
Truth: Timely assessing your score is crucial even if you do not have any outstanding debt as this assist in detecting fraudulent or error activities.
- Misconception: It is best to have zero credit accounts than to hold any.
Truth: Holding zero credit accounts might make it tough for the banks to evaluate your credibility. Responsible usage of credit is important for an excellent credit score.
- Misconception: My credit score reflects my character or personal qualities.
Truth: Your score is totally a financial measure of how you use your credit and your behaviour considering your outstanding due repayment and not a reflection of your ethics, character or personal attributes.
Also Check: Experian Credit Score
- Misconception: My score will never witness a change
Truth: Your score by nature is dynamic and prone to change depending on your credit activities and financial behaviour over time.
- Misconception: Repaying just the minimum- amount due (MAD) on my credit card will not negatively impact my credit score.
Truth: While paying the minimum due avoids penalties, it may negatively impact your credit score due to high credit utilisation.
- Misconception: I can manipulate my credit score by opening multiple credit accounts.
Truth: Opening multiple credit accounts within a short period may raise concerns among lenders and negatively impact your credit score.
- Misconception: Paying off all my debts will result in a perfect credit score.
Truth: While paying off your debts is essential; a perfect credit score isn’t solely dependent on being debt-free. Factors like credit utilisation, payment history, and credit mix also influence your credit score.
- Misconception: Applying for multiple credit cards simultaneously will boost my credit score.
Truth: Applying for multiple credit cards at once can harm your credit score. Each application triggers a hard inquiry, which temporarily lowers your score. It’s advisable to space out credit card applications and only apply for cards you genuinely need.
- Misconception: Closing a credit card will immediately remove it from my credit history.
Truth: Closing a credit card account does not erase its history from your credit report. The account’s information will remain on your report for a certain period, impacting factors like credit utilisation and length of credit history.
To conclude, it is necessary to be well-versed in the common myths about credit scores. Knowing the reality behind the scores allows you to make a better financial decisions, attain your financial goals quickly and form a strong credit score over time. Periodically reviewing your score via reliable platforms such as Experian or CIBIL can endow a valuable insight into your finances and assist you take a more proactive measure towards ameliorating and building an excellent credit score.