Insufficient understanding of concepts usually leads to myths. And when it comes to the financial world, where extensive understanding of terms and concepts make a material difference, one surely cannot afford to not know the widely-accepted myths. Here are some common myths floating around credit score:
Don’t Get a Credit Card, Just use Debit Cards
Carrying a credit card would ultimately result in damaging one’s credit card debt is a popular misconception held by many. While it is true that some people are not good at handling credit cards or have personality types that tend to max out any credit limit, for the responsible kind- it’s one of the easiest methods to establish and build their credit history. On the other hand, debit cards precisely do nothing to help establish credit history.
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One’s credit score reflects one’s capability to behave responsibly when one is lent money. Banks and loan providers use this credit score to see the likelihood that one will repay the loaned money within the stipulated time period. So, this score looks at one’s behavior when one had borrowed previously and draws conclusions on one’s repayment patterns. On the contrary, debit cards do not involve the bank lending any money, so they are not included in one’s credit score. Having a credit card in one’s wallet doesn’t just mysteriously bring in debt, but it could surely help improve on one’s credit history.
Closing Down One’s Credit Card Could Lead to High Credit Score
Not defaulting on one’s card payments is better than returning the credit card. Cancelling or closing down one’s credit card services only brings down one’s available credit limit and pushes up the credit utilisation ratio. A high credit utilisation ratio would only lead to a low credit score. Instead, it is advisable to responsibly use the card and make up for it’s debts, keeping its utilisation low.
Employers Can Check One’s Credit Score
It is only with one’s due permission can an employer pull out a credit report but not a credit score. In fact, such a credit report review is only considered a soft inquiry in contrast to a hard one from potential lenders or credit card issuers. These hard inquiries could negatively affect one’s credit score if they signal that one is seeking out new credit from many places.
Don’t Accept a Credit Limit Increase
No doubt that getting an offer from your lender to increase one’s credit limit is an attempt to lure one into a trap. But one could use this to one’s own advantage.
So long as one keeps utilization low, a credit limit increase is not harmful. If one makes a call and asks for an increase, the bank may want to review your score and put a hard inquiry on your report. This could lead to a 10 points drop. On the contrary, when a bank offers to give one an automatic credit limit increase, the score will not be negatively impacted. In fact, it just gives one a chance to improve one’s credit history.
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For instance, if an individual has 1 credit card with a credit limit of $2000 and spends around $800 a month on one’s credit card, that’s amounts to a 40% utilization ratio.
Now, let’s assume that the bank offers one an increase of $1000 on one’s credit limit. If one maintains one’s monthly spending the same at $800 while having the limit increased to $3000, one’s utilization will decrease to about 27%. This little change will help move one’s credit score up.
One’s Income Tells One’s CIBIL Score
One’s income has no role to play in the computation of one’s credit score. The CIBIL report does not capture one’s income.
One may see cases of a low CIBIL score for rich people with high income due to multiple reasons. Whereas, an average earner could have responsibly worked towards a strong credit score.