Most Common Myths about Credit Score

When talking about credit scores, there are many common myths and misconceptions that keep the borrower’s judgement in doubt or dilemma. A credit score is an important number which is considered by lenders when you apply for a loan, credit card or any other credit product. Credit score, which is calculated and generated by the Credit Information Companies (CICs) or credit bureaus, is checked by lending institutions before any loan or credit card approval.

Several times, your credit score is also fetched by insurance companies to decide your premium amount and/or coverage. Read on to remove all your misconceptions and misunderstandings regarding myths regarding credit scores.

Understanding Credit Score – Common Myths 

As credit score can easily be misunderstood, it is important to debunk the most common credit score misconceptions related to credit score.

Myth 1: Regular check of credit score lowers it

This is the most common error in understanding the credit score. When you pull your credit score from a credit bureau, it is counted as a soft enquiry and this does NOT lower your credit score. The more updated you are on your credit score, the higher your chances of getting credit approved. Multiple checks or downloads of your credit report do not lower your credit score.

Myth 2: Monthly income affects credit score

Credit score is calculated basis the information mentioned in your credit report and your income is NOT mentioned anywhere in your credit report. Therefore, you could be having a CTC of Rs. 15 lakh and still have a poor credit score if your credit behaviour is not good. Likewise, a person with a fairly lower income may have a high credit score, if their credit history is healthy, i.e. timely payment of bills and balanced credit utilization, among other factors.

Also Know: How does Credit Information Bureau Limited (CIBIL) calculate credit scores?

Myth 3: Credit Score is the sole determinant in securing a loan or credit card

Yes, credit score plays a vital role in getting favourable loan options and good credit cards but it’s not the only factor here. There are other factors like your age, payment history, repayment capability, job type and nature, credit mix, etc. Your credit score could be good but it won’t be the only deciding factor for banks in loan sanctioning.

Myth 4: Closing old accounts can help improve credit score 

Many people believe that having more than two credit cards will pull down their credit score. Thus, they tend to close their older credit accounts by giving up their credit cards which are no longer in use. This can inadvertently go wrong, as closing an old credit account will shorten your credit history. A long credit history helps the lender understand your credit behaviour better. However, if you feel that you can lose your credit card or will not be able to use it judiciously, then consider closing that credit card after a thorough analysis.

Suggested Read: Pros and Cons of Owning Multiple Credit Cards

Myth 5: Debit cards can help build a credit score

Purchasing anything via debit cards is just like paying in cash. You are not borrowing from a lender but only using the money that’s already in your bank account. This does not impact your credit score in any way.

So, what helps to improve your credit score?

Follow the below-mentioned tips to witness a gradual rise in your credit score, as it is not an overnight process:

• Pay your loan EMIs and credit card dues on time
• Try to pay in full; if not, at least pay the minimum due amount
• Turn on the Standing Instructions (SIs) or auto-pay feature to never miss an EMI or due date
• Don’t close your old accounts as they depict your long and healthy relationship with the bank
• Check your credit report regularly to identify and resolve errors by raising a dispute online
• Don’t apply for multiple loans or credit cards in a short time duration or simultaneously

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FAQs

Q. Will checking my credit report once or multiple times lower my credit score?

Ans. Checking your credit score once, twice, or even multiple times does not lower your credit score, as checking your credit score from a credit bureau is considered as a soft inquiry that does not negatively impacts your credit score. Even if you download or request a copy of your credit report from Credit Information Company (CIC), then also it remains constant and does not fall.

Q. Will closing a credit card improve my credit score?

Ans. No, closing your new or old credit cards can further lower your credit score, as it will add burden to your balance credit limit and increase your credit utilization ratio. Therefore, it is recommended to avoid closing your old credit accounts, including loans, credit cards, cash credit, overdraft, etc.

Q. Can I have multiple credit scores?

Ans. Yes, you can have multiple credit scores from different credit bureaus. Four credit bureaus operating in India named TransUnion CIBIL, Experian, Equifax, and CRIF High Mark calculate, generate, and issue credit scores of millions of consumers. Therefore, you may get four different credit scores from each credit bureau because each bureau uses a different algorithm or mathematical formula to generate your credit score.

Q. Is it true that paying off a loan early will hurt your credit score?

Ans. Paying off a loan early or foreclosing your loan may incur some fees and you might see a slight drop in your credit score. The drop in your credit score shall be minor or temporary because various factors will get affected, such as payment history, total debt, credit mix, credit utilization, etc.

Q. Is it true that having a single missed payment will drastically lower your credit score?

Ans. Yes, indeed, even a single missed payment may drastically lower your credit score because timely payments and payment history is one of the significant factors that are thoroughly checked by the credit bureaus while calculating and generating your credit score.