Busting Credit Score Myths: What You Need to Understand
A solid credit score is essential for opening doors to financial opportunities, such as getting approved for loans, credit cards, and better interest rates. But the world of credit scores is full of myths that can trip you up. In this post, we’re going to bust some of the most common credit score myths and set the record straight.
Myth 1: CIBIL is the Only Credit Bureau in India
CIBIL may be the most well-known credit bureau in India, but it’s not the only one. The Reserve Bank of India has authorized four major credit bureaus: CIBIL, Equifax, Experian, and CRIF High Mark. Each of these agencies uses its own formula to calculate your score, so your credit score could be slightly different depending on which one you check.
Myth 2: Your Credit Score is the Only Factor for Loan Approval
A good credit score is important, but it’s not the only thing lenders look at when deciding whether to approve your loan. Lenders will also consider other factors like your age, income, job history, and how long you’ve lived at your current address. They’ll also review your documents, KYC status, and your debt-to-income ratio.
Myth 3: You Need Loans to Build Credit
It’s a common misconception that you need to take out loans to build your credit. While loans are one way to establish a credit history, using a credit card responsibly is another great option. Paying your bills on time and keeping your credit utilization low are key to building a strong credit score.
Myth 4: Closing Old Credit Cards Will Boost Your Score
It might seem like a good idea to close old credit cards to improve your credit score, but doing so can actually hurt you. The age of your credit accounts is an important factor in your score, and older accounts help improve this. Rather than closing old cards, try using them for small purchases and paying them off in full to keep them active.
Myth 5: Maxing Out Your Credit Card Doesn’t Matter
Maxing out your credit card can hurt your credit score more than you might think. Your credit utilization ratio, which is the amount of credit you’re using compared to your credit limit, is a major factor in your score. Experts recommend keeping your utilization below 30%. Maxing out your card can raise your utilization rate and negatively affect your score.
Myth 6: A Low Credit Score Means You Won’t Get a Loan
While a low credit score can make it harder to get approved for a loan, it doesn’t automatically mean you’ll be turned down. Some lenders, including banks and non-banking financial companies (NBFCs), may still approve loans for individuals with scores below 750. However, these loans might come with stricter terms or higher interest rates.
Myth 7: Your Income Affects Your Credit Score
Your income doesn’t actually affect your credit score. What matters is how well you manage your credit. That said, a steady income can help you manage your finances better, which can lead to making timely payments and improving your score.
Myth 8: Using a Debit Card Helps Improve Your Credit Score
A debit card doesn’t help your credit score because it doesn’t involve borrowing money. Debit card transactions are linked directly to your bank account and aren’t reported to credit bureaus. To boost your score, you need to use a credit card and pay it off on time.
Myth 9: Every Credit Application Will Hurt Your Score
It’s true that applying for credit can result in a “hard inquiry” on your credit report, which may temporarily lower your score. However, if you space out your credit applications and avoid applying for too many at once, the impact on your score will be minimal.
Myth 10: Checking Your Credit Score Lowers It
A common myth is that checking your own credit score will hurt your credit. In fact, checking your score is considered a “soft inquiry” and doesn’t affect your score at all. Regularly monitoring your score can help you track your financial progress and spot any potential issues early.
In Conclusion:
Knowing the truth about credit scores is crucial to managing your financial life. By debunking these common credit score myths, you can make smarter decisions that will help you build and maintain a strong credit score. Remember, a good credit score is one of your greatest financial assets—take the time to understand how it works, and you’ll be better prepared to achieve your financial goals.
