15 Credit Score Myths You Need to Know to Boost Your Finances

Sep 25, 2023 / Reading Time: Approx. 7 mins

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15 Credit Scores Myths You Need to Know: Boost Your Finances

A credit score is a numerical value, typically composed of three digits ranging from 300 to 900, reflecting an individual's ability to repay loans. The credit score holds the utmost significance among the various factors evaluated by banks and Non-Banking Financial Companies (NBFCs) when deciding whether to approve or decline a loan application.

This is because it provides lenders with an assessment of your creditworthiness. The higher your credit score, the more appealing you are to banks and NBFCs, as it signifies a reduced likelihood of defaulting on a loan. Consequently, a higher credit score serves as the primary determinant for loan approval, while a lower credit score diminishes your chances of securing a loan.

However, since credit scores can easily be misunderstood, there are various misconceptions about them. Moreover, because many people lack awareness about credit scores, individuals believe them to be true. However, trusting such myths can put you into serious financial problems. Hence, it is imperative to debunk these common credit score myths for financial clarity.

[Read: What Is Credit Score And 8 Guaranteed Ways to Improve Your Credit Score]

Myth 1: There exists a single, universal credit score for everyone.

Debunked: Indians can have multiple credit scores depending on the credit bureau that calculates the score. In India, there are four credit bureaus responsible for computing credit scores:

- TransUnion CIBIL

- Equifax

- Experian

- CRIF High Mark

These bureaus primarily evaluate and assign ratings to individuals or business entities by gathering and scrutinising their credit information and repayment records. Among these bureaus, the CIBIL score provided by TransUnion Credit Information Bureau (India) Limited (CIBIL) is predominantly preferred by banks and NBFCs throughout the country.

Myth 2: Credit scores and credit reports are the same.

Debunked: Many individuals assume that the credit score and credit report are the same. While these two terms are interconnected, it is necessary to understand that they are not the same thing. A credit score is a single numerical grade ranging from 300 to 900 that depicts your credit history. Whereas the credit report is a comprehensive compilation of your credit-related information that provides a detailed look at your financial situation, including your credit score itself. A credit report typically consists of - your personal information, credit accounts, credit inquiries, and any public records related to your financial history.

Myth 3: Checking your credit score can negatively impact your credit score.

Debunked: This is the most common credit score myth. In reality, periodically keeping an eye on your credit score allows you to monitor it and make necessary improvements. Reviewing your credit score is classified as a soft inquiry and does not have a negative impact on your credit score. Your credit score will only be harmed when you apply for a loan or credit card, resulting in a company conducting a hard inquiry.

Myth 4: Your income has a direct influence on your credit score.

Debunked: Credit scores simply measure your risk level in terms of whether you consistently pay your bills on time and in full. A high credit score indicates that you pose a low credit risk, while a lower score suggests a higher risk.

While possessing a higher income doesn't automatically assure a better credit score, updating your income information with a card issuer to a higher amount might result in an increased credit limit. This increase could positively impact your credit utilisation ratio, provided you continue to settle your balance completely each month.

Myth 5: Maintaining an outstanding credit card balance helps improve your credit score.

Debunked: Maintaining an outstanding balance on your credit card not only carries the risk of reducing your credit score but can also lead to substantial financial setbacks due to higher interest rates and late payment charges. Instead, it is advisable to settle your entire credit card bill on or before the due date, as this practice helps in keeping your credit utilisation ratio low. A higher credit utilisation ratio can adversely impact your credit score.

Myth 6: Paying off debt automatically boosts your credit score.

Debunked: This holds true when it comes to credit card debt, but the same principle doesn't apply as strongly to instalment debt, such as a Home Loan or Personal Loan. While achieving a state of being entirely debt-free is beneficial for your overall financial well-being, paying off an instalment loan like an Education Loan, for instance, may not significantly boost your credit score. In fact, it could slightly lower your score because it means having fewer active credit accounts. However, this doesn't imply that you should refrain from paying off the loan; it's essential to avoid unnecessary interest expenses over time, even if it means sacrificing a few points on your credit score.

Myth 7: Closing old credit accounts helps improve your credit score.

Debunked: Another common credit score misconception involves the belief that holding more than two credit cards can have an adverse impact on your credit score. Hence, individuals often opt to close their older, unused credit card accounts. However, this approach can backfire because closing an old credit account actually diminishes your credit history, which plays a crucial role in helping lenders better understand your financial behaviour. Rather than doing this, it is advisable to focus on settling your debts and outstanding EMIs or bills as a means to improve your credit score.

Myth 8: Loan approvals are entirely determined by your credit score.

Debunked: While a credit score unquestionably plays a significant role in approving or denying a loan application, it is not the sole determining factor. Lenders also weigh other factors such as age, income, years of work experience and more when arriving at a decision. Therefore, while maintaining a good credit score is crucial, it is equally important to meet other eligibility criteria.

Myth 9: Using 'Buy Now, Pay Later' services invariably harms your credit score.

Debunked: Payment options like LazyPay and Simpl, which offer "Buy Now, Pay Later" services, provide a convenient way to make purchases today and pay within a predefined duration, typically 15 to 30 days.

However, it is essential to note that not all "Buy Now, Pay Later" providers evaluate your creditworthiness during the registration process. This implies that you may accumulate debts that you cannot settle, potentially negatively impacting your credit score and making it challenging to secure loans in the future.

Myth 10: Student loans have no bearing on your credit score.

Debunked: Any loan, irrespective of its type, such as a Home Loan, Car Loan, Personal Loan, Credit Card Loan, or Student Loan (Education Loan), can impact your credit score. Hence, it is crucial to timely pay your EMIs.

Myth 11: Using debit cards contributes to building a credit score.

Debunked: A common misconception is that debit cards have the same credit-building potential as credit cards, but this notion is incorrect. The explanation is rather straightforward: your credit score assesses your creditworthiness based on your ability to borrow and make timely repayments. However, when you use a debit card, you are spending your own funds and not utilising any form of credit. Consequently, debit cards do not contribute to building or enhancing your credit score.

Myth 12: Applying for new credit drastically lowers your credit score.

Debunked: Applying for a new loan or credit card will not affect your credit score. However, in case of an application rejection, you should wait a few months before reapplying as submitting multiple applications in a short duration can negatively impact your credit score. This is because the lender typically performs hard inquiries when checking your credit history as part of the loan approval process.

Myth 13: You must strive for a perfect credit score.

Debunked: Although achieving a perfect credit score, typically around 850, is commendable, it is not mandatory for achieving financial success. Having a solid credit score, typically in the range of 750 and higher, is adequate for gaining access to favourable loan terms and various other financial opportunities.

Myth 14: It's impossible to improve a poor credit score.

Debunked: Most individuals become distressed when they discover their poor credit score and assume it is a permanent situation. Nonetheless, if your existing credit score is poor, it doesn't imply it can't be improved. Poor credit scores can be transformed into favourable ones gradually by implementing sound financial practices, such as settling outstanding debts and consistently paying bills.

Myth 15: There are quick fixes to repair bad credit.

Debunked: While settling debts promptly is praiseworthy and enhances your creditworthiness as time passes, you should understand that there is no quick fix for instantly boosting your credit score; it happens gradually. Establishing a strong credit score requires maintaining a pattern of consistent, timely repayments and gradually decreasing your total debt load.

To conclude:

By debunking these credit score myths, you can make well-informed choices about your finances, achieve better financial clarity, and work towards improving your credit score. In today's age, with information readily accessible, it is advisable to rely on reliable sources to build a strong credit history.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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