Credit score is one of the most important factors that is considered when you apply for a credit card or any other loan requirements. Thus, it is important to know what a credit score is and what factors affect the credit score.
A credit score is a 3-digit number that shows your creditworthiness. The higher the score, the better for the borrower in terms of loan amount available. A credit score is based on credit history, that is, the number and types of credit accounts, total debt, repayment history etc. Credit scores help lenders analyze the capacity of an individual to repay the loans on time.
Due to a lack of awareness, there are a lot of myths about credit scores circulating in the market. So it is important that you clear your misconceptions about credit scores.
Here are a few myths around credit scores below that we have busted:
This is the most common misconception that people have about credit scores. People are often concerned and found asking 'does checking cibil score affect cibil score'. Checking your credit or cibil score will NOT lower it. In fact, checking your credit score will help you track your progress and take action to increase your credit score as and when needed.
This is not true. Carrying a balance on your credit card will lower your credit score and you might as well end up losing a lot of money by paying higher interest. Pay off your credit card bills on time each month to keep a low credit card utilization rate. This will ensure that you have a good credit score.
False. Your income in no way affects your credit score. The factors that affect the credit score include your repayment history, credit utilization rate, debts, length of credit history, credit mix and so on.
You might be interested in - Why CIBIL score is so important?
This goes hand in hand with the myths discussed before. Your credit score and income have no relation whatsoever. A credit score is only used to measure your credit risk. For example, if you have a low income but you have paid your bills on time consistently, you will have a good credit score.
It depends. If you are paying your credit card or any other loan, it can increase your credit score. Foreclosing a credit line is viewed as responsible credit behavior and improves your credit score. But if you pay installment debt like a mortgage or a loan, your credit score will not increase. However, this does not mean that you shouldn't pay such debts. If you have funds, always pay your debt.
Not true. All types of loans, be it a car loan, home loan, student loan, mortgage will affect your credit score. Pay all your debts on time to maintain a good credit score.
False. Your marital status does not affect your credit score. Even if you apply for a joint loan, the credit score of each partner will be taken into consideration. Similarly, Multiple loan applications make you look credit hungry to the borrowers which will reduce your CIBIL score.
Debit cards do not offer any credit and hence are not displayed on your credit report. Therefore, using debit cards will NOT help you build a credit score.
False. Closing a credit card will actually lower your credit score. However, if your credit card has an annual fee and if you are losing money by keeping the card, you may close it.
Also, read - Top Tips on Improving your Cibil Score
Low credit score can impact the outcome of your loan application but it does not guarantee rejection. Credit score is just one of the important factors taken into account by lenders. There are various other factors that are also taken into account by the lenders.
False. Along with the credit score offered by agencies like CIBIL, and CRIF High Mark, lenders also look at your income, your job profile, and other factors and can sanction a personal loan, although at a higher interest rate.
We hope that this blog was able to help you clear all your misconceptions about credit scores and provide you with a lot more clarity.