Your credit score is a numerical representation of your creditworthiness, and it plays a crucial role in determining your ability to secure loans, credit cards, and other financial opportunities. However, various myths and misconceptions surround credit scores, leading individuals to make financial decisions based on misinformation. In this article, we will debunk common credit score myths and unveil the truth about what really impacts your CIBIL rating.
Myth 1: Closing Credit Accounts Improves Your Score:
Reality: Closing credit accounts can actually harm your credit score. It may reduce your available credit, potentially increasing your credit utilisation ratio, which is a key factor in determining your score. Instead, consider keeping older accounts open to maintain a longer credit history.
Myth 2: Checking Your Credit Score Lowers It:
Reality: Checking your own credit score, known as a soft inquiry, does not impact your score. It’s considered a routine part of monitoring your financial health. However, hard inquiries made by lenders during credit applications can have a minor and temporary impact.
Myth 3: High Income Equals a Higher Credit Score:
Reality: Your income is not directly factored into your credit score. While lenders may consider your income during loan approval processes, credit scoring models focus on your credit history, outstanding debts, and payment behaviour.
Myth 4: Paying Off Debt Erased It from Your Credit Report:
Reality: While paying off debts is crucial for your financial health, the history of those debts remains on your credit report for a certain period. Positive payment history contributes to a higher credit score, while negative incidents, like late payments, may stay on your report for several years.
Myth 5: You Only Have One Credit Score:
Reality: There are multiple credit scoring models, with the FICO and CIBIL scores being widely used. Each model may weigh factors differently, resulting in variations between scores. It’s essential to monitor your scores from different sources for a comprehensive understanding of your credit health.
Myth 6: Avoiding Credit Altogether Improves Your Score:
Reality: While using credit responsibly is crucial, avoiding it altogether may not necessarily lead to a higher score. Lenders assess your credit history to gauge your creditworthiness. Having a diverse mix of credit types and a positive payment history can positively impact your score.
Myth 7: Defaulting Ruins Your Credit Forever:
Reality: While defaulting has a significant impact on your credit score, it’s not a permanent stain. Over time, as you demonstrate responsible financial behaviour, the impact diminishes. Rebuilding credit through secured credit cards and responsible financial management is possible after defaulting.
Understanding the truth behind credit score myths is essential for making informed financial decisions. Your credit score is a dynamic representation of your financial habits, and by debunking these myths, you empower yourself to take control of your credit health. Regularly monitoring your credit report, making timely payments, and maintaining a diverse credit mix are key steps in ensuring a positive credit score. Remember, a well-managed credit profile opens doors to financial opportunities and paves the way for a secure financial future.
Laksh Dua, Co-Founder WeCredit – One Stop Shop For All Your Credit Needs!