A Credit Score is a report on how you have used credit over a period of time. When you apply for a loan, it helps lenders like banks to get an insight into your credit usage patterns which eventually gives them the probability of repayment of loan, if issued.
In India, CIBIL is the primary institution that issue a credit report. Although there are other companies like Experain or Equifax which are trying to get their foothold in this business, CIBIL report is now increasingly being used by organization before they approve your loan.
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Top 10 Credit Score Myths & Misconceptions
Credit Score is relatively a new concept in India and so there are many myths and stories hovering around it. People tend to believe a lot of hearsay that goes around. Here are the top 10 myths which you will hear very oftenand why you should NOT believe in any of these-
- Checking your credit score very often will have a negative impact on it
Just like the balance in your bank account remains the same whether you check it once a week or once a month, the credit score will not be affected if you apply for a credit report to check your score.
- Credit score is not important if you do not need a loan
Some of you may not need loans now and so you may not bother about the score. But that is a wrong belief, as you never know when you might land up in a financial emergency and require a loan. Loans also help you leverage your money which you might think of sometime in the future. In all such situation, a bad score may deprive you from availing the very needed loan. Soon, many institutions like insurance companies will start using your credit score to decide on the plan/service they want to offer you and even the premium may vary with your credit score.
- Keeping a credit card balance will lead to a better credit score
Not paying your credit card bills on time only leads to penalty charges and interest payments. It does not help in improving the credit score in any way.
Your income is factored in the calculation of your credit score
Your income, bank balance, assets, wealth etc. are not factored in your credit score, as these numbers are not available with the credit rating institution.
You can avail loan in name of spouse if yours credit score is not good
The credit score for husband and wife is calculated by CIBIL separately and so both will have a different credit score based on their individual credit repayment history.Institutions at times reject the loan applications, especially joint loans, even if one spouse is having a bad credit score.
Increased usage of credit card will lead to a higher credit score
I am not sure if this was a case of misleading promotion that higher usage of credit cards will lead to a higher score but that line of thinking is totally wrong. More or less usage of credit cards does not lead to change in your credit score. It’s the way you use your cards, the number and type of loans you avail and the payment history which impact the credit score.
Your academic background affects your credit score
It does not really matter to CIBIL whether you are an undergraduate or have a doctorate in Astrophysics while calculating your credit score. Your loans and credit payment pattern are the primary factorswhich forms the basis of your credit report.
- Credit score is the only parameter for institutions to evaluate your loan application
When you approach a financial institution for loan, they consider a number of factors apart from your credit score like your income, risks involved in the project or risk appetite of the lending institution etc. So even if your credit score is good, it does not guarantee a loan.
Bad score in the past cannot be rectified at all
A bad score will have a negative impact on your ability to avail loans. But it is not set in stone. If you start paying your credit card bills on time and do not default on other loan payments, your score gets improved in the future.
- CIBIL has a cut-off score for credit institutions
CIBIL does not command whether to give you a loan or not. It gives a score based on your credit repayment historyand the financial institutions decide on the basis of this score, along withother factors, whether to lend money or not.
A credit report will tell you how good or bad you have been in repaying your liabilities/dues. To avoid getting deprived from a loan when you actually need it, remove all myths around the credit score and check it periodically. It will also ensure you can take appropriate measures timely, if you have a bad credit score. Please share your questions & concerns about credit score in comment section.