Common Credit Score Myths

What is Credit Score?

Whenever you apply for a credit card or loan, you may come across the term credit score. Credit Score is a number that tells banks or financial institutions about how you manage your finances.

Through this score, banks can easily decide if you are worthy of receiving a credit or not because your credit report will contain all the details about how you have managed your past credit.

Credit score plays an important role in the approval of your loan or card application. If you have a high score, you will get a loan or credit card easily, but if you have a low score, you might not get one. Not everyone is aware about how the credit score works and there are various myths related to it that people believe in.

Some of the common myths related to credit score are as follows in the next Slides:

Request for Report to Lower Score

Some people think that if they place a request for their credit report, their credit score will decrease. It is not true. The process of requesting for your own credit report is called soft enquiry. Such enquiries have no impact on the credit score as they are not recorded in the credit report. Only hard enquiries have an impact on this score as they are recorded in the credit report. When you apply for a loan or credit card, your bank may request for your credit report for evaluation purposes. Such requests are called hard enquiries. It is advised to check credit report before applying for any loan or credit card to ensure that are there no mistakes in the report.

Clear Debt to Erase History

It is another myth that many people believe in. They think that paying off all outstanding payments will erase the payment history from their credit reports. The truth is that all the details in credit report are present for around 5 to 6 years. These details include information related to closed loans, credit cards, etc.

Defaulters check Reports

Many people think that only defaulters must check credit reports, which is not true. Everyone should check their credit reports to identify errors. Mistakes in credit report can reduce credit score, which is why people are advised to check their reports to ensure that the information is correct.

No History Equals to High Credit Score

Another myth related to credit score is that no credit history is equal to a high score. In reality, no credit history means no score because credit bureaus have no information to calculate the score. Also, it will have a negative effect on loan or credit card applications as banks will not be able to assess if the applicant is worthy of credit or not. To start building your credit score, you should get a credit card.

Nothing happens to a Co-Signers or Guarantors Score

By agreeing to become a co-signer or a guarantor in case of loan, you agree to become liable for that loan. So, in case of late payment or default by the primary borrower, your score will be affected as the information will be recorded in your credit report too. If you become a co-signer or guarantor, then keep track of all the repayments and check your credit report regularly.

Close Unused Credit Cards to Increase Score

This is not true. Lenders like giving credit to people who have a low credit utilisation ratio (CUR). Closing unused credit card accounts will reduce the total credit limit and increase the utilisation ratio, which in turn will decrease your credit score. So, if you want to close an unused credit card account, make sure that you increase the credit limit of other credit cards.

Scoring System Same for All Bureaus

No, the scoring system of all the credit bureaus in India is not the same. There are 4 credit bureaus in India and all of them score differently.

When it comes to financial matters, it is always best to cross-check and be sure about the information that you have. Believing in myths, like the ones mentioned in the previous slides can lead to financial problems.

Thanks for going through the slides