Credit Score Myths and Misconceptions: What You Need to Know

Today, obtaining credit from financial institutions or NBFCs, whether for a bike, car, house, or business expansion, is a common practice. Your loan or credit card approval largely depends on your CIBIL score. This number reflects your creditworthiness and indicates the likelihood of your timely loan repayment. A higher credit score can make it easier to access credit, often at better interest rates.

Many people are familiar with the term credit score, but they often fall for common credit score myths. Misunderstanding how credit scores are calculated can negatively impact your borrowing decisions. Understanding the truth behind these credit myths is crucial for effective credit management and can help establish a strong credit history.

What Is a Credit Score and Why Does It Matter? 

A credit score is a three-digit number calculated by credit information companies. It is based on your repayment history, credit behaviour, and credit utilisation ratio. Lenders use credit scores to decide whether to approve a loan or credit card and to determine interest rates. A good credit score helps you access loans and credit cards more easily, with faster approvals, higher limits, and better interest rates. Checking your credit score regularly enables you to understand your financial health and take steps to improve your score.

Key Factors That Influence Your Credit Score 

Understanding the main factors behind your credit score helps debunk common misconceptions about credit scores:

• Payment history: Late or missed payments lower your credit score. Consistently paying on time shows reliability and has a positive impact on your credit score.
• Credit usage: Using more than 30% of your credit card balance can negatively impact your credit score. A low credit utilisation ratio signals responsible borrowing.
• Length of credit history: A longer credit history indicates that you can manage credit effectively. Closing old credit cards can slightly lower your credit score.
• Credit mix: Having a diverse range of credit accounts, including personal loans, credit cards, and other types of loans, demonstrates responsible credit management.

While all the above-mentioned factors can positively or negatively affect your credit score, here are a few beliefs that are nothing but misconceptions.

Common Credit Score Myths Debunked

Even a minor misconception about credit behaviour can lower your credit score or impact your credit in ways you don’t expect. Let’s debunk the common credit score myths so you know what really helps build your credit and achieve a higher credit score. Misconceptions about Credit Score

1. Closing a credit card will improve your score: The length of your credit history plays an important role in determining your creditworthiness. Closing an old credit card account can slightly lower your credit score. Keep older cards and pay your credit card balance on time to help build your credit score.
2. Checking your score is bad for your credit: Checking your own score is a soft inquiry and does not impact your credit score. Only hard pulls by lenders when applying for a loan or credit card can slightly lower your score.
3. Missed EMIs won’t affect credit score: Even a single missed repayment can decrease your credit score significantly and remain on your credit report and score.
4. Credit cards always boost your score: Maintaining one credit card responsibly is enough. High balances or multiple cards without careful management can negatively impact your credit score.
5. High income increases your score: Income does not affect credit scores. Credit scores are based on repayment history, credit utilisation ratio, types of credit, and credit behaviour.
6. Credit scores never change: Your CIBIL score can fluctuate depending on your financial behaviour. Timely payments and low utilisation improve your score, while missed payments or high balances lower your credit score.

Debunking these common misconceptions about credit scores can help you build and improve your credit over time.

How Credit Inquiries Affect Your Credit Score

Credit inquiries happen whenever someone checks your credit report and score:

• Soft inquiries: Checking your credit score does not affect your credit score.
• Hard inquiries: Lenders reviewing your report for a loan or credit card can slightly lower your credit score. Multiple hard inquiries in a short period negatively impact your credit score.

Applying for credit at intervals and regularly monitoring your credit behaviour helps maintain a good credit score.

Tips for Improving and Maintaining Your Credit Score

1. Pay bills on time: Timely payments are one of the most important factors affecting your credit score.
2. Use credit wisely: Keep your credit utilisation ratio low. Using one or two credit cards for small purchases paying them off on time can boost your credit score.
3. Manage your debt: Keep balances low and create plans to repay high utilisation. This can improve your score and show positive credit behaviour.

Good credit management takes patience and consistency. Responsible use of old credit cards, credit cards, and loans helps increase your credit and maintain a higher credit score.

Conclusion:

Before applying for a loan, take a moment to check your CIBIL score. A higher credit score can help you secure better loan offers and lower interest rates. Checking your credit score regularly, paying EMIs on time, and maintaining low credit card balances can improve your score steadily. This ensures you build your credit history and maintain good credit management.

Frequently Asked Questions

Does checking my credit score lower my credit rating? 

Checking your credit score is a soft inquiry and does not affect your credit score.

Will closing old credit cards improve my credit score? 

Closing old credit cards can shorten your credit history and reduce your overall credit limit, which may slightly lower your credit score.

How do missed payments affect my credit score? 

Missed or late payments remain on your credit report and lower your credit score, affecting future borrowing.

Is having multiple credit cards bad for credit scores? 

Having multiple credit cards can help build your credit if managed responsibly. Paying on time and keeping your balances can improve your overall score.

How long does it take to repair a bad credit score? 

Improving a poor credit score can take six months to a year of consistent credit behaviour, a low credit utilisation ratio, and timely payments.

What are the biggest myths about credit scores? 

Common credit score myths include thinking that income affects scores or that checking your score lowers it. Repayment history, types of credit, and credit behaviour affect your score.

How can I improve my credit score quickly? 

Pay all bills on time, reduce credit card balances, maintain a low credit utilisation ratio, avoid multiple credit applications, and review your credit report and score regularly for errors.