Misconceptions about Credit Scores

Today obtaining credit from Financial Institutions or NBFCs to expanda business, buying a bike/ car or planningto buy a new house has become a way of life now. But the chances of your loan application getting approved are largely dependent on your credit score. This numerical figure essentially indicates your credit-worthiness, or you could say it measures how capable you are of repaying your loan. Naturally, the higher your credit score, more easily will you get a loan, and also at a lower interest rate. Though the term credit score understandable to many but, a few actually understand what it entails and why a good score is necessary. This often leads to many myths and misconceptions about credit score.

However, before we go through the myths surrounding credit scores, we must understand the key factors driving it.

Key Factors Driving Credit Score

1. Payment history: Late or missed payments can hamper your credit scores badly. Paying bills on time is important as it shows that you are someone who is reliable and more likely to pack back the debtspunctually.

2. Credit usage: Finance experts suggest using a credit card at a maximum of 30% of your credit limit shows that you can manage your finance well and use your credit responsibly. Someone with credit utilization of above 30 percent is more likely to be a loan defaulter.

3. Length of credit history: The longer you manage your credit account responsibly, the more credit and worthiness you will make among lenders. For example, if you have just got your first credit card, your credit history will naturally be low. Similarly, closing your oldest credit card account can have a negative impact on your scores.

4. Credit mix: Before lending you money, lenders generally like to see your credit mix i.e. the number of credit cards, mortgages, loans and other credit lines you have. Someone who has responsibly used a mix of accounts and has multiple lenders trusting him with credit is given a high credit score.

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

Misconceptions about Credit Score

1. Closing a credit card will help you score: The length of your credit history is important for your credit score. It is a good idea not to close a credit card that you have been holding for years. Instead, keep them open, use them when needed and pay the balance off at the end of every month.

2. Checking your score is bad for your credit: This is one of the prevalent myths. It is true that it hurts when an inquiry is done by a lender, or your credit report faces a hard pull. However, when you yourself check your credit card, it is a soft pull and it never hurts your credit standing. You are officially allowed to check your credit report for free once per year.

3. Missed EMIs/ repayment wouldn’t affect credit score: Many people think “I have been regular in paying off my debts. How much difference would one missed EMI make?” The answer is a lot. One missed EMI can bring down your credit score significantly, which can take upto fewmonths, or even years to restore.

4. Credit cards are good for your credit score: Having one credit card and maintaining it for a long time is good for your credit score. However, having multiple credit cards can affect your credit score as it portrays you as someone who has a borrowingpropensity.

How to Improve Your Credit Score

1. Pay your bills on time: This is one of the most important factors that make up to 40 percent of your credit score. Utilize your limit wisely and pay the bills ahead of time to have a perfect credit score.

2. Up your credit line: This doesn’t necessarily mean that you need to have a wallet full of credit cards. However, having one of two credit cards and using them responsibly can surely up your credit line. Open a credit account, make a small purchase every month and pay it off well on time, to move towards the perfect score.

3. Manage your debt: As stated above, managing your debt and keeping the balances low can help improve the credit score. Even if at some point you had to use more than 30% of credit limit, create plans to pay it off as soon as possible.

Finally, good credit scoresdon’t happen overnight. It needs patience and consistency in financial decisions. The positive effects of making on-time payment and careful utilization of credit limit might need some time to reflect on your credit scores.