Myths around credit scores that will change the way you approach it

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A good credit score says a lot about your financial discipline. Individuals and businesses around the world are increasingly becoming aware and conscious of monitoring their credit scores. There is a lot of material on the internet about how a great credit score can make you very creditworthy. But do we know the common myths about credit scores? Read on to know more.
Myths around Credit Score you should know
We all know that a good credit score (750+) can make the loan approval process faster and hassle-free. Contrary to what we believe, a good credit score might not get you a loan easily. Let’s look at the common misconceptions around credit scores and how we can be aware and well-informed about the same.
• Good credit score guarantees credit/loan approval – While in most cases, this is true, there are exceptions too. Lenders consider credit score as an important benchmark but they look at other factors too. For example, a recent delay in payment of your dues, or a loan settlement issue, can affect your chances of approval for a loan. Lenders also look at factors like your current income level, the reason for availing of a loan, etc. before they approve a loan. However, a poor credit score definitely means the chances of approval for a loan are very low.
• Credit score is affected by income level – People believe that higher income translates to a higher credit score. This is 100% untrue. A person might fall in the low-income bracket, but if they maintain good financial discipline and pay all their dues within time, their credit score can be very high. On the other hand, a person in the high-income bracket with poor financial discipline will undoubtedly have a lower credit score. Your annual income does not play any role in determining your credit score but your financial discipline does.
• You won’t get credit without a credit score – There is always a first time for everyone when applying for credit. Lenders understand that and look at other parameters to determine the creditworthiness of the applicant. Factors such as age, income level, place of work, etc. are considered by lenders for such applicants. So don’t fret, and apply for credit now.
• Bad credit score will always result in rejection – While a bad credit score does not help while applying for credit, it does not always mean no lender would be available. Lenders also look at it as an opportunity to put across stringent terms and conditions. You might have to pay a higher rate of interest or have to pledge collateral, but some lenders would be willing to give credit.
• **All credit products have a similar benchmark for credit score **- It’s a common misconception that a higher credit score will guarantee the chances of approval for all credit instruments. For example, a gold loan requires a gold article as collateral and hence credit score doesn’t play much of a role here. Similarly, a home loan is based on collateral while a personal loan or credit card isn’t. Study all the available options before you apply.
• Regular monitoring/checking of credit score will lower it – Another common misconception that most people have. Inquiring about your credit score is considered a soft inquiry and hence doesn’t affect your credit score. Regular monitoring can in fact help you improve the score as you can take timely actions.
• All lenders check the **score for credit assessment – **That isn’t always true. We have 4 credit bureaus in India that are RBI-authorized and reliable. Other than , Equifax, Experian, and CRIF Highmark are the ones that lenders refer to for credit scores.
• A bad credit score cannot be improved – Don’t be disheartened if your credit score is low. You could always work towards making it better. Set up a reminder routine so you pay all the bills on time. A good way to improve your score is to consolidate all debt and clear them off as soon as you can. You could also take a low-interest loan to clear off a high-interest loan. With time and good financial management, your credit score can improve over time.
• Old bad credit history can be removed from your account by clearing the dues – While the old credit history does go away from your account in some years (usually 7 years), it doesn’t go away as soon as you pay off your dues. Since your debt-paying discipline is a reflection of your credibility, it stays on your account for years for lenders to understand your financial habits.
• **Debit cards help in building the credit score – **Debit cards are only linked to the savings account which is your own money. They do not have any influence on your credit history or credit habits. Hence, debit card usage does not affect your credit score at all.
• Using more credit can make the credit score better – This is not always true. As always, financial discipline is very important in paying off your credit. Taking more credit but not paying it off on time will bring your credit score down. Missing payment due dates or only paying partially, are all habits that will lower your credit score.
• **New credit applications can lower the credit score **– This can be a little tricky. While an application for new credit does not affect your credit score, you should be cautious about how often you are applying. If your application gets rejected, wait for some time before reapplying. Also, applying for too many credit cards or loans all at once can bring down the credit score.
• Credit scores take a long time to change – Credit scores are updated by credit bureaus regularly and hence your financial decisions on a day-to-day basis can quickly change the score. A delay in payment can bring the credit score down in the next report cycle. On the other hand, good financial discipline can bring your score up slowly but steadily.
Confused about what can actually help you maintain a good credit score? A good financial discipline goes a long way in maintaining a good credit score. So, let us also look at what good financial disciple means –
**How to improve your Credit Score **
• Paying your bills/dues on time – The most important factor probably in maintaining your financial discipline. Timely payments of your EMIs, credit card bills, loans, etc. show your creditworthiness and hence can improve your credit score.
• **Credit Utilization ratio **– It is advisable to keep your credit utilization ratio under 30%. This is because a higher utilization ratio shows a higher need for credit. This ratio can simply be calculated as –
Credit Availed
*100
Credit Utilized
*100
• **Apply for new credit on a need-basis only **– While you might get credit easily, apply for it only if you need it. Remember any type of credit ultimately needs to be paid off. Avoid taking unnecessary credit.
Conclusion
A good credit score can work in your favor in many ways. But one should be aware of the misconceptions around it. While a good credit score can get you a loan easily, it is not always the case. Your recent transactions also determine the probability of credit being approved. Credit scores are also not affected by income or usage of debit cards. A bad credit score doesn’t mean no credit available, however, you might have to adhere to stricter terms and conditions. Credit is also available for applicants with no credit score and there are ways to improve your credit score too. Be aware and take informed decisions for your financial health.

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Updated December 9, 2022 at 6:24 PM
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Stylianos Kampakis

My name is Stylianos (Stelios) Kampakis and I am a data scientist. I have been involved in the area of data science and artificial intelligence for more than a decade.
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