Posted on: November 16, 2015

Top 4 Credit Score Myths Debunked

Credit Score

Myths of any kind can be dangerous, and those related to financial health are no different. Credit score is one of the biggest measures of financial health. Being misinformed about your credit score can cost you dearly and badly impact your financial health. So, debunk the myths to manage your credit score:

 

MYTH 1: Paying Off Your Disputed Loan Will Clean Credit Report

Any default made by you will stay in your credit report for 7 years. So, even if you repay your outstanding loan amount, it will reflect in your credit report. Also, if you repay the previous overdue amounts by entering into a settlement with the bank, your credit report will show “settled” against your account status. This too will have a negative impact on your credit score.  The only way towards a clean report is to continue to pay off your loans and credit card dues (whether past or current) on time. 

 

Must ReadFactors that Affect Your Credit Score

 

MYTH 2: Discarding Credit Cards Lead to Better Credit Score

Nothing can be more far from truth than this. Contrary to popular assumption, closing a credit card can negatively impact your credit score as your credit utilization limit per card will increase if your spend remain the same. Higher credit utilization will mean that you are credit-hungry, signaling banks to be cautions when extending loans to you.

For example, if you have 3 cards each with a credit limit of Rs 50,000, your total limit works out to be Rs 1.5 lakh. Assuming your total monthly credit card spend to be Rs 30,000, your credit utilization works out to be 20% (Rs 30,000/Rs 1,50,000*100). Now, if you close one of your credit cards, your total credit limit will fall to Rs 1 lakh while your credit utilization will go to 30% (Rs 30,000/Rs 1,00,000*100).

 

MYTH 3: No Credit or Low Credit Means Higher Score

This is one of the common misconceptions about credit score. If you don’t have credit how will your credit score be built? In fact, at times lenders deny loan to a person who doesn’t have a credit history (Read: How to build credit history). If you avail a loan or own a credit card and pay the bills and EMIs on time, you will be able to build a credible track record. This will work as a reference for the banks and they will be willing to lend you money.

 

MYTH 4: Enquiring About the Credit Score will Lead to Bad Credit Score

Checking your credit at least once a year is considered a good practice. When you enquire about your credit score, it is considered a “soft enquiry” and doesn’t affect your credit score. However, when you approach several lenders simultaneously or in quick succession, their queries on your report will be considered as “hard inquiry” and will impact your credit score.

 

Must Read3 Reasons Why You Should Check Your Credit Report Regularly

 

Always remember that incomplete or wrong information is very dangerous. So, don’t let these myths hurt your wallet and credit score.

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