6 Credit Score Myths Busted!

For the common man, credit scores and credit reports are elusive concepts. Most people do not understand the requirement, let alone the basis for calculating the credit score. This has led to a number of half-truths and sometimes, outright misinformation about what a credit score is and how banks and financial institutions use this score. Here, we aim to shed light on some of the myths surrounding the subject.

Simply put, your credit score is a number that represents your credit worthiness. It is calculated on the basis of your active loans, your repayment history, and your repayment behaviour. Banks will almost always check this score when you apply for a loan or a credit card. A low score means that your application will be denied or you will get approved at high interest rates.
Some of the most common myths surrounding credit scores are debunked here.

1. Checking my credit score too often will decrease it: If you check your credit score rarely or often, it does not have any effect on it. When you check your score, it is considered a soft enquiry by the bureau and therefore the frequency of your checks has no impact on your score. However, whenever you apply for a credit card or loan, banks perform an enquiry on your credit score and credit score. This is considered as hard enquiry. If such enquiries are performed very frequently, then it does have some negative impact on your credit score.
2. My credit score can be improved by using prepaid credit cards and debit cards: Prepaid credit cards and debit cards are of no concern to the credit bureaus and using them has no positive or negative effect on your credit history. Instead, you can try using secured credit cards that are good credit-building tools. These can be quite useful if managed properly and subsequently, you can apply for a regular credit card.
3. Only specific unpaid bills show up on my credit report and affect my credit score: If the creditor reports paid and unpaid debts to the credit bureau then each type of debt is recorded on your credit history. Mortgage companies, credit card issuers, and apartment complexes are a few types of creditors who report to credit bureaus. If you have any questions whether a creditor reports to the bureau or not, you can simply make an inquiry.
4. My income affects my credit score: Your income, whether it is individual or household, is not related to your credit score. Your credit score is calculated on the basis of your payment history, account balances, credit history, various types of credit you have acquired, and new credit applications.
5. Not having credit cards and debts results in a good credit score: Not having credit cards or any debt does not build your credit score. Your credit score is built on the foundation of your acquired credit and how effectively you have managed and repaid it. In fact, no credit activity makes lenders sceptical about your repayment capability. When a bank sees that you do not have a credit card, then in their eyes you are a risky prospect. It is always better to have some kind of credit activity such as home loan or car loan.
6. I don’t have to check my credit score if I am paying my bills and debts on time: You should check your credit score at least once a year. Credit bureaus deal with large amounts of data and mistakes do happen. Even incorrect reports may show up on your credit report. It might be as simple as incorrect credit card balance or errors in your debt repayment report. By checking your credit score once a year, you can ensure that your credit report only reflects your true credit history. In the case of any error, you can directly contact your lending institution and credit bureau for rectification.