Common myths about credit scores debunked and factors influencing your credit rating

Whether you want to apply for a loan or a credit card, your credit score will play an important role in the approval process. Lending institutions will assess your creditworthiness by looking at your credit report. Your credit score is a 3-digit number between 300 and 900, with a score close to 900 showing you in a positive light as a responsible borrower.

Credit information companies like CIBIL, Equifax, and CRIF High Mark consider various factors, such as repayment history and types of credit accounts, before computing your credit score. However, not everyone understands how the credit score is calculated, leading to several credit score myths being promoted. In this article, we debunk such myths and explain the factors that are pertinent to your credit score.

Let us take a closer look at some of the common credit score myths.

You shouldn’t check your CIBIL score often or it will decrease

One of the most prevalent credit score myths pertains to checking your CIBIL score. People often believe (mistakenly so) that checking their credit score will decrease the score and refrain from analysing their credit report. However, that is just a misconception. In fact, it is a good practice to check your credit score once every month or two to see where you stand and take appropriate measures to improve your credit score.

Carrying balance on your credit card will improve your credit score

Some individuals believe that carrying a balance on your credit card will enhance or improve your CIBIL score. However, that is not the case. Carrying a balance on your card can decrease your credit score and result in paying high interest rates. You must pay your credit card bills before the due date every month to keep the credit utilisation ratio below 30-40%.

The higher your income, the higher your credit score

Another common credit score myth is that people with higher incomes inevitably have higher credit scores. However, your income does not affect your credit score. The main factors that influence your CIBIL score include your repayment history, credit utilisation ratio, credit age, types of credit accounts, and credit mix, among others.

Paying off all types of debt will increase your credit score

While it is true that foreclosing a credit line will boost your credit score, as it is viewed as responsible behaviour, not all types of debt are the same. For example, paying instalment debt like a loan or mortgage may not always translate to an improved credit score.

If you have a high credit score, you are rich

Another common yet unfounded credit score myth is that if you have a high credit score, it means you are rich. As previously mentioned, there is no correlation between your credit score and income. For instance, if you draw a relatively low income but pay all your bills on time, you will still have a high credit score.

After marriage, your credit score will be merged with your spouse’s

It is important to remember that your marital status does not influence your credit score in any way. Moreover, even if you apply for a joint loan with your spouse, each partner’s credit score will be considered.

A student loan will not affect your credit score

Another credit score myth you must be wary of is regarding a student loan. While it is commonly believed that a student loan will not impact your credit score, the reality is that similar to a home loan or personal loan, even a student loan will affect your credit score. You can maintain a good credit score by repaying the loan amount on time.

You can use a debit card to build a good credit score

A debit card does not offer a line of credit, so it does not affect your credit score and will not appear on your credit report.

Closing a credit card will boost your credit score

Another widely believed credit score myth is that you can improve your credit score by closing a credit card. The reality is the opposite; individuals are encouraged to keep even their old credit cards as they increase their credit age. Additionally, closing a credit card can result in a decrease in your credit score. However, if you pay a high annual fee, you can close your card to save money.

You won’t get any loan if you have a low credit score

While having a good credit score significantly improves your chances of loan approval, your loan application won’t get rejected just because you have a low credit score. Lenders consider various factors, including your repayment history, job profile, and annual income, before making a decision.

• It is important to separate myths from facts when it comes to credit scores.
• Some of the common myths include that higher income automatically translates to a higher credit score, checking the score often decreases it, and using a debit card frequently will improve your credit score.
• Debunking such myths and knowing how you can actually improve your CIBIL score will enhance your creditworthiness.

Understanding the realities behind credit scores is essential for managing your financial health. A credit score is more than just a number; it represents your financial credibility. By dispelling common myths, you can make better, informed decisions about your credit and take control of your financial future.

Remember, your credit score is not the only factor—how you manage your financial commitments matters just as much. Stay proactive by regularly monitoring your score, paying bills on time, and focusing on long-term financial stability. Your score reflects your financial habits and responsibility.