Having a healthy credit score is very important so that it helps you in your life in order to avail of a loan at any point in time, be it a home loan, personal loan or even credit card. In fact, some organisations also check credit scores before providing employment. Hence having a great credit score is important but there are certain myths that need to be busted for you to understand its importance.
A credit score of 750+ is a great score to avail of a loan. However, there are lots of misconceptions around the concept of credit scores.
Hence, busting the myths is important for you to increase your credit score as well.
Some of the Myths are as Follows
1. Checking Your Credit Score Very Frequently Would Reduce the Overall Score
This is one of the biggest misconceptions that most people suffer from if you monitor your credit score closely, it would harm your overall score.
Truth: If you continuously check your credit report and monitor your score, also known as a soft inquiry, it would ideally have no effect on your credit score. You are free to examine and check credit score and report.
Fact: Your credit score hurts only if you apply for multiple loans in a short period of time and you get frequent enquiries from the lenders.
2. Income and Investments Affect Your Credit Score
Most people believe that their income level directly influences their credit score.
Truth: In reality, your income is not a factor that affects your credit score.
Fact: Most credit rating agencies, such as CIBIL, ICRA and CARE, do not consider your salary or investments when calculating your creditworthiness.
3. Closing Your Old Credit Cards or Savings Accounts Improves Your Credit Score
Some people believe that using old or unused savings accounts and credit cards could improve your overall credit score.
Truth: However, doing so may have the opposite effect. Part of your credit score is determined by your credit utilisation ratio, i.e. the total amount of credit that you use as against the total credit that has been allocated to you. Closing savings accounts have no role to play in your credit score at all!
Fact: Closing old accounts can reduce your overall available credit limit, potentially increasing your utilisation ratio and harming your score.
4. Pay Off All Your Loans at Once to Improve Your Credit Score
While paying off debt is generally a good financial practice, the idea that paying off all your debts at once will immediately maximise your credit score is a misconception.
Truth: Your credit history, including on-time payments and the length of your credit accounts, plays a significant role in your credit score.
Fact: Gradually reducing your debt over time and maintaining a consistent payment history is a more effective strategy.
5. Revolving Your Credit Balance is Good for Your Credit Score
A lot of people feel that holding a small credit card load might help them boost their credit score.
Truth: In actuality, carrying a debt is not required to develop or maintain a decent credit score.
Fact: Paying your credit card debt in whole and on time each month indicates good credit management and helps you avoid incurring excessive interest charges.
6. Credit Score is for the Rich
A lot of people believe that only the rich have and need credit scores, which is completely incorrect.
Truth: There is no correlation between credit and wealth.
Fact: Credit rating agencies do not even have records of your income, wealth, or investments at the time of providing a credit score and you would have known this had you checked your credit report even once!
7. Student Loans do not Affect Credit Score
People often feel student loans are small ticket loans and hence won’t affect your credit score.
Truth: All loans affect credit score and if they are not repaid on time, could ruin your credit score for good.
Fact: Even student loans need to be repaid on time else your Credit Score could get affected and that too very early in life!
8. Credit Card Settlement Won’t Affect Your Credit Score
Another misconception is that settling the outstanding credit card dues without making a full payment would not affect your credit score. Only later do you realise what a big mistake you have made!
Truth: If you have used the credit, you should pay it off completely and never opt for settling it with the credit card company. For now, they will stop chasing you with a settlement amount but your credit score will get scarred for life!
Fact: Credit card settlement leaves a big mark on your credit score and it takes a good long while to remove it.
9. Low Credit Score Equals No Loan
Most people with lower credit score believes that they would not be able to avail of a loan because of their low credit score. That is not completely true.
Truth: People with low credit score also gets a loan from some organisations but at a higher rate of interest.
Fact: So, if you wish to avail the best rate for your future loans, you should have a high credit score. Not only does availing of a loan become easier with a good credit score, but you can get the best rates as well! So, ensure you check credit score and report regularly and monitor it properly.
You need to be aware of the facts behind these credit score myths in order to effectively manage your financial situation. It’s crucial to remember that the main aspect that genuinely affects your creditworthiness is responsible financial behaviour, such as on-time payments, minimal credit card balances, and prudent debt management.
You can take charge of your financial future and make informed decisions about it by dispelling these myths and keeping up with your credit and will be able to control your financial future.
So, don’t hesitate to check credit score and report regularly to ensure your financial well-being.