Beware of These Credit Score Myths

The initial thing that you learn is the importance of maintaining good financial health by forming a budget, controlling your debts, and building your emergency fund. One of the common myths that many have is that debt of all types is bad. So, many individuals often refrain from availing of credit. However, there are situations where credit can be extremely useful.

Thanks to credit, now it is possible to conduct big-ticket purchases, begin a business, and simply deal with financial exigencies, and then make repayment of the proceeds later. Likewise, countless students take up education loans to pursue higher studies and repay the borrowed amount over the repayment tenure. Their credit report and score decide their credibility. A low credit score may enhance the chances of availing credit card or loan rejection. Therefore, anyone should avoid having your credit scores to be low, and another factor to consider is paying off debt vs credit repair. These include various misconceptions and myths linked with credit scores that many the credit applicants must

What is a credit score?

A credit score is a representation of a 3-digit number that indicates your credibility based on your credit history. Your credit score endows lenders like HDFC, BAJAJ etc., with an idea about your borrowing habits and potential to repay the loan or credit card debts on time. Note that after you apply for a loan with a lender, the first thing the lender will do is fetch your credit report. Say you approached HDFC bank, for HDFC CIBIL score check will be the initial thing that it will do to judge your repayment capacity. Likewise, if you approach BAJAJ, then for BAJAJ CIBIL score check will also be very important.

Just by reviewing your spending pattern, repayment pattern and thorough credit history, lenders like banks and NBFCs can determine whether you qualify for the credit option or not and your maximum limit on it. In India, many creditors factor in your credit score computed by any one of the 4 crucial credit scoring agencies called CIBIL, Equifax, CRIF High Mark and Experian. It is a 3-digit credit score that ranges anywhere from 300 to 900, and a credit score of 700 and above is considered as good.

What is a good and poor credit score?

Credit scoring agencies review your financial and credit history to decide your credit score. Depending on the 3-digit number, you get your credit score, which may be considered good, poor, or average.

Good credit score

In India, a credit score is looked upon as good if it is 750 and above and can be attained by maintaining disciplined and good credit habits. There are various benefits of attaining a good credit score. For instance, creditors generally provide you with a good credit score at lower interest rates on credit cards and loans. Also, creditors tend to offer a lower processing fee on loans to you if you have a lower score. Besides this, you also may enjoy a higher credit card limit, scope of negotiations and faster credit approval.

Poor credit score

A credit score is looked upon as low if it falls under the 300-749 category. This can impact your chances of availing of a credit card or loan approval. If you hold a score that falls in such a range, you must undertake serious actions to ameliorate it. Besides these, owing to a low credit score, you may witness frequent rejections from lenders, or if in case your loan is approved, it may be at a higher interest rate, higher insurance premium etc.

Here are the top 5 credit score myths and facts you must be aware of –

Credit score change reflects slowly

Change in credit score depends upon your financial choices. Thus, whether your credit score is good or poor may differ as per the financial decisions that you undertake today and in future. Credit score and the reports are periodically updated to show your current credit and economic activity. Actions like skipping your repayments, late repayments and defaulting on the loans may impact your credit score in a negative way. On the contrary, if you show some sensibility with money, you may ameliorate your credit score quickly. Over time, ameliorating a low credit score is possible by showing good credit behaviour instead of avoiding the credit altogether.

Getting married may merge scores.

If you are getting married and think that your spouse’s strong score will ameliorate yours also, think once again! As far as credit rating agencies are considered, you and your partner are 2 individual entities holding separate credit histories. Unless you choose joint accounts or undertake financial decisions jointly, the chances of your score being impacted are marginal. In the case of a mortgage, where the credit scores of both partners are evaluated, even if one of you has no good credit score, it may be a major issue.

Debit cards build your credit score.

Irrespective of how well you manage your debit account, it may not affect your score at all. By using debit cards, you simply can use your parked money from your account in place of borrowing the same from a financial institute, like a lender or bank. Additionally, transactions done with debit cards are not reported to the credit scoring agencies by banks. So, using your debit card to repay your college fee or phone bills will not assist in building or ameliorating your score.

No debt equals a good credit score.

While you must not go into debt to form a strong credit score, not having any type of debt in your report will not assist you either. Lenders usually check your past credit history to judge how you manage your money, and holding no credit score will not assist.

To form good credit health without deep diving into debt, make sure you use at least one of the credit methods, and conduct timely repayments.

A poor credit score means rejection.

A poor credit score may not close all the avenues for your future credit requirements. Your score is computed based on your repayment pattern and credit history, which assist you in assessing your repayment credibility. While you may still avail loan or credit card with a low credit score, it may come with more conditions.

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