Myths About Credit Score

Myth: A bad credit score lasts forever

Fact:

A bad or poor credit score does not last forever unless you don’t make your finances better. Your credit score is a numeric expression of your creditworthiness or how you manage your finances. Just like how bad financial habits can lead to a poor credit score, good practices such as paying bills on time, etc. can improve your credit score.

Myth: All debts have a negative impact on your credit score

Fact:

Credit scores are calculated by agencies known as credit bureaus. They acquire and maintain a record of every individual’s credit details and helps lenders to understand how worthy an applicant is. This information is collected from data providers. These providers include creditors, debtors, and debt collection agencies etc. Thus lenders can understand how likely a person is for default and who they should grant credit to. The major credit bureaus in India are as follows-

Myth: Prepaid credit cards boost your credit score

Fact:

Prepaid credit cards cannot boost your credit score but help you build your score. For an individual with poor credit score, a prepaid credit card or secured credit card is the gateway to the credit world. However, you need to make your EMI payments on time in order to improve your credit score.

Myth: Checking your own credit score reduces your score

Fact:

There are two types of inquiries that get generated when a credit report is pulled. One is a hard inquiry which is recorded when a bank or financial institution checks your credit report. This can affect your credit score by few points. When you check your credit report, a soft inquiry is generated which does not affect your credit score.

Myth: Your bank income affects your credit score

Fact:

Only your credit information is considered when calculating your credit score. None of the bank details such as your savings and investments are considered when calculating your score. However, a bank account balance may affect your credit score if you bounce cheques and don’t pay your EMIs.

Myth: Closing my credit accounts will help my score

Fact:

Paying your debts in time and fully is the best way to improve your credit score. However, closing your credit accounts can affect the length of your credit profile which in turn can drop your credit score. The age of your credit profile comprises 15% of your credit score. Therefore, it is best to never close your oldest credit card accounts unless they are not aligned with your lifestyle needs.

Myth: Only one credit score exists

Fact:

There are four credit bureaus in India namely, CIBIL TransUnion, Experian, Equifax, and Highmark. All the credit bureaus have different algorithms that are used to assess your creditworthiness. This is another reason for your credit scores varying when it is assessed by different credit bureaus. Please note a credit score above 750 is considered excellent and can get you easy approval on personal loans.

Myth: Negative information stays on my report forever

Fact:

Any negative information such as credit defaults or bankruptcies don’t stay on your credit report forever. Credit defaults remain on your credit report for a period of 2 years from the date it was reported. Bankruptcies generally stay on your credit report from 7-10 years. If you wish to remove your Settled mark from your report, it is better to clear your unsettled amount.

Myth: Employers Check Credit Scores

Fact:

It depends on where you are working. Generally, employers don’t check your credit score unless you work in the banking sector.

Myth: Bad credit score means you’ll never be approved for anything

Fact:

A poor credit score means you missed your payments or defaulted them. There is always a possibility of improving your score. Moreover, having a bad credit score does not limit you from getting credit. You can still get approval if you pledge collateral or with high-interest rates.

Myth: Getting married will merge your credit scores

Fact:

A credit score is a numeric expression of YOUR creditworthiness. It does not get merged when you get married. However, if you apply for credit jointly, a default in payment can lead to a drop in both your credit scores.

Myth: An error in the credit report cannot be changed

Fact:

An error in your credit report can always be disputed. However, in order to know an error, you must check your credit score regularly. Moreover, an error can be disputed on the basis of where the error has occurred. Therefore, if you see an error in your report, it is best to check your score from all the other bureaus to know if the error is from the bureau’s side or from the respective lender.

Myth: You Need to Check the Score Only If You’re Applying for a Loan

Fact:

It is important to check your credit score regularly to check for errors and assess your creditworthiness. Checking your score only when you apply for credit would limit your chances to improve it.

Myth: Credit Limit increase will reduce my credit score

Fact:

An increase in your credit limit is good for your credit score. This helps in reducing your credit utilization ratio which in turn improves your credit score. Credit utilization comprises 30% of your credit score.

Myth: Carrying a Balance on Your Credit Card Helps Your Credit Score

Fact:

Carrying a balance on your credit card does not help your credit score but affect it adversely. A balance in your credit score means you did not pay off the balance before the due date and therefore affect your payment history. The payment history comprises 35% of your credit score.

Myth: You Need to Take On Debt to Build Credit

Fact:

You can apply for a credit card to start building your credit. In fact, it is easier to build credit with a credit card when compared to taking a debt. Alternatively, you can apply for a small-amount personal loan to create your credit history too.

Myth: It’s easy to determine how an action can impact your credit score

Fact:

The algorithms used to calculate your credit score is private with the credit bureaus and hence is not easy to determine the impact of an action. However, there are majorly 5 credit score factors:

• Payment History (35% of your credit score)
• Credit Utilization (30% of your credit score)
• Length of credit history (15% of your credit score)
• Credit Mix (10% of your credit score)
• Credit Inquiries (10% of your credit score)

Myth: Going From Excellent Credit to Bad Credit Takes a Long Time

Fact:

Even a single default in payments can affect your credit score by 30 points. In other words, a drop in your credit score can happen in an accelerated manner however building it back takes time and diligence.

Myth: Credit Repair Companies Can “Fix” Your Credit Score

Fact:

Your credit score can be fixed by your credit activities. Since your actions have a direct impact on your credit score, it is best to fix your credit activities than getting a credit repair company on-board.

Myth: You Can’t Get Approved for Credit If You Don’t Have a Credit History

Fact:

Although your credit history is one of the important determinants for loan approval, it is not the only one. Your income also plays an important role in deciding whether or not you are eligible for a credit.

Myth: If You Have Excellent Credit, You’ll Never Get Denied

Fact:

Although your credit score is one of the important determinants for loan approval, it is not the only one. The other factors that affect the decision are as follows:

• Age
• Employment Type
• Employer
• Location

Myth: Getting Your Credit Score Is Impossible Unless You’re Willing to Pay for It

Fact:

You can get one free credit report every year from all the credit bureaus. However, some online lending portals such as IndiaLends give you credit report worth ₹1200 for free.

Myth: Your Rent and Utility Payments Can Help You Build Your Credit Score

Fact:

Only credit activities have an impact on your credit score. These could be paying your EMIs on time and in full, not closing old accounts, not applying at too many institutions, and more. Your rent and utility payments do not affect your credit score.

Myth: I can't control my credit score

Fact:

YOUR activities are recorded in your credit report and any wrong activity that you do affects your credit score. Therefore, improving or damaging your credit score is completely in your control.

Myth: Paying Off Negative Debt Boosts Your Credit Score Immediately

Fact:

Paying off your negative debt will improve your credit score, however not immediately. Improving your credit score is a gradual process and takes time and diligence

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