Common Myths About Credit Scores

A credit score is a three-digit numerical representation of your creditworthiness in finance. It typically ranges from 300 to 900 and can vary based on your credit history, repayment behaviours, and other factors pertinent to your credit utilisation.

Scores closer to 900 indicate better creditworthiness, while those far below 900 are considered worse. i.e., the higher your credit score, the greater the possibility of securing credits, which often results in better rates and terms. However, banks and NBFCs in India typically regard a credit score of 700 or above as ideal. Such candidates can easily expect to receive credits such as personal loans, mortgages, credit cards, overdraft facilities, etc.

It is also important to note that certain misconceptions or myths prevail among people and may hinder them from maintaining good scores and taking full advantage of the available credit benefits. Hence, Urban Money presents 12 common myths about credit scores that you might mistakenly perceive as true. Let’s scroll down to see what they are.

1. You Only Have One Credit Score

You have one CIBIL score but multiple credit scores. India has four major credit bureaus: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. Under RBI regulations, each bureau maintains your credit score separately. The scoring models of each bureau can also differ slightly. Nevertheless, TransUnion CIBIL is recognised as India’s most widely used credit score.

2. All Debts Equally Damage Your Credit Score

This is another common myth about credit scores. However, most debts can positively impact your credit score, subject to certain circumstances and your repayment behaviour. These include car loans, mortgages, credit card usage, overdraft facilities, and other credit options for revolving debt. It is also important to note that default on timely repayment, excessive use of credit cards, or accruing multiple credits in a short span of time can incur a significant drop in your credit score.

3. Credit Score Gets Lower as You Check It

Many people believe that their credit scores decrease when they check it. Notably, multiple loan applications in a short span of time may lower a credit score, but there is no impact on a credit score as you check it. It is, in fact, advisable to check your credit score more often. This will help you be more informed about your finances and enable you to notice any discrepancies in your credit report.

4. Credit Score Gets Higher When You Foreclosure the Loan

This is also one of the common myths about credit scores. In truth, your credit score will not increase due to loan foreclosure. It will decrease as you foreclose the loan. When you foreclose your existing loan before the tenure ends, the credit bureaus consider it a violation of your agreement with the lender during fund disbursement. So it is advisable to think twice before loan foreclosure, as it can damage your credit score.

5. Closing Unused Bank Accounts Harm Your Credit Score

Your credit score will not be impacted as you close an unused or unwanted bank account. A credit score is primarily influenced by your credit activities, such as the amount of money you owe, length of credit history, repayment record, types of credit, etc. I.e., your credit score is calculated based on your credit profile rather than your bank account information. Hence, whether you close your bank account or not, the credit bureau companies care nothing about it unless you have any negative/outstanding balances.

6. You Must Go into Debt to Build Credit

This is another myth that one must go into debt or take a loan to build a better credit score. While taking loans and repaying them without default can eventually lead you to a robust credit score, it is possible to build a good credit score without incurring unnecessary debt. Namely, using a credit card for daily purchases/bills and paying off the balance each month can build credit. This habit ultimately empowers you to build a better score and avoid paying interest or going into debt.

7. A Higher Credit Score Means You are Rich

This is a common misconception among many people. A higher credit score does not necessarily mean that you are rich. Instead, it signifies that you are good at managing debt and have a good repayment habit. Credit bureau companies in India do not directly consider your wealth, income, or overall financial assets when assessing your credit score. It is also important to recognise that a wealthy individual with poor credit management can have a lower credit score. Your credit score indicates your credit management, not your financial status.

8. Credit Mix Can Damage Your Credit Score

Credit mix refers to availing of various credit products such as personal loans, student loans, car loans, mortgages, etc. And if you have heard that credit mix will damage your credit score, it is another common myth about credit scores. On the contrary, the credit mix can benefit your credit score. When you secure various types of credit products and manage those without default, credit bureau companies view you as someone who can manage multiple credits simultaneously. This ultimately leads to a higher credit score rather than damage it.

9. The High Credit Score Guarantees Loan Approval

While a high credit score can significantly improve the chances of loan approval, it does not guarantee it. Lenders consider various factors besides credit scores, such as income, employment stability, existing debts, and more. A high credit score reflects a good credit history and financial behaviour, which can lead to better interest rates and terms. Still, each lender has its own criteria for loan approval.

10. Student Loans Do Not Affect Credit Score

The statement that student loans do not affect credit scores is incorrect. Like any form of credit, student loans can impact your credit score.  Namely, student loans fall under the instalment loan category, which can either make or break your credit score based on how well you manage your loan. Hence, make a timely repayment of your student loan to avoid any negative impact on your score.

11. Credit Repair Companies Can Fix Your Score Overnight

It is possible to cause errors or discrepancies in your credit report. This can also impact your credit score, and informing the pertinent credit bureau company via their official website is recommended. However, the claim that credit repair companies can fix your credit score overnight is inaccurate. Repairing credit takes time, and you can expect to amend the error within 30 days, but it cannot be done instantly.

12. Your Credit Score Only Matters for Loans

This is also one of the popular common myths about credit scores. A credit score holds an influence that goes far beyond needing a loan or any other credit product. They are pivotal in your financial journey, including insurance premiums, rental agreements, and even cell phone plans. Moreover, a good credit score empowers you to secure a better interest rate and terms as you borrow money. This ultimately facilitates significant savings on your hard-earned money over time.