What is a Credit Score? Myths about Credit Score

When applying for a credit card or any other loan, your credit score is one of the most crucial elements examined. As a result, it is critical to understand what a credit score is and what factors influence it.

A credit score is a three-digit number, typically between 300 and 850 that indicates how creditworthy you are. The higher the score, the greater the loan amount available to the borrower. A credit score is determined by a person’s credit history, which includes the number and kind of credit accounts, total debt, repayment history, and so on. Credit scores assist lenders in determining an individual’s ability to repay debts on time.

When applying for a credit card or any other loan, your credit score is one of the most crucial elements examined. As a result, it is critical to understand what a credit score is and what factors influence it.

Myths About Credit Scores

Below are a few myths about credit ratings that we have debunked:

Examining Your Credit Score/CIBIL Score Will Reduce It

This is the most common misunderstanding concerning credit ratings. People are frequently concerned and wonder, “Does checking CIBIL score affect CIBIL score?” Examining your credit or CIBIL score will NOT reduce it. In fact, monitoring your credit score will allow you to track your progress and take action to improve your credit score as needed.

Your credit score is determined by your annual income

Your annual income does not affect your credit score. An individual with a yearly salary of Rs.5 lakh could obtain a score of 816. Similarly, a person with an annual salary of Rs.10 lakh would not have a good credit score. Your credit score is determined by the number of credit lines you have and how well you manage them.

If you earn Rs.10 lakh per year and have never used a credit card or taken out a loan, you may not have a credit score at all. In contrast, you may have a Rs.5 lakh annual income and a well-maintained credit card. This will result in a high credit score, possibly as high as 800+ score.

Applying for New Credit Can Damage Your Credit Score

You should be aware that applying for a new credit facility will have no effect on your credit score as long as you do not apply to every accessible lender in a short period of time.

If you apply at each lender, each one places an inquiry on your credit record. Numerous inquiries demonstrate that you are desperate for financial assistance, lowering your score.

You Can View the Credit Report Your Lender Can See

It is a fallacy that a customer has access to the same version of their credit report as a lender. A credit rating agency offers a lender with a thorough version of your credit report. In contrast, whether it is a free or paid copy, you will receive the credit report in a far more concise manner, with only the details you need to know presented.

Marriage will combine your scores

In actuality, there is nothing like credit score consolidation. Credit scores are determined based on individual financial behaviour, regardless of marital status. Having joint bank accounts will have no effect on your credit history or score.

A debit card helps to improve one’s credit score

Debit cards do not help you create a credit history or obtain a credit score. Because a debit card is only used to access your savings account balance and does not cover the idea of ‘credit,’ so any transactions made with it will not be used to create your credit history or credit score. To begin building your credit history, you must obtain a credit card or a loan. Your credit score will be computed once your credit history has been established. However, moving from NA to a score will take some time.

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Paying off debts removes the transaction from your credit report

Do not believe that paying up a loan would remove the entry from your credit history. The debt evidence will remain on your credit history for years, affecting your credit score and credit availability.

Such entries in your credit history will demonstrate that you have handled your debts carefully and successfully paid them off. It will reassure any potential lenders and put a good word in for you. Missed payments and defaults registered might inform lenders about your finance managing capabilities and prevent them from granting your credit application.

Negative information can remain on your report for up to 7 years, while bankruptcy information can remain for up to 10 years.

A credit score is likely the single most important indicator of your ability to obtain a loan, making it crucial for us to maintain our credit scores. CIBIL is a popular credit rating bureau in India that is used by the majority of banks. Its score act as the first impression of the applicant in front of the credit lenders.

A good credit score not only increases our chances of acquiring a loan/credit, but it also helps us acquire a better interest rate from lenders.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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