Top 10 Credit Score Myths that need to die

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.

Top 10 Credit Score Myths

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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.

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{ 12 comments… add one }
  • BALYA January 31, 2014, 1:28 PM

    What about Mr. Vijay Malya, who has taken loan from n number of banks and is not repaying teh loan on time. All this CREDIT SCORE is for middle class people only. If mistakenly if anyone missess one instalment. Next time the bank will take that point only and will not approve his loan.

    • KRANTIVIR RAJPUT January 31, 2014, 3:36 PM

      YES so True!!

  • Apurva Gandhi January 31, 2014, 1:49 PM

    Dear Hemant,

    Very good observations on credit score. A CIBIL credit score is not free and costs Rs. 470 every time you want one. But a participating credit institution will also pull out your score, for every kind of loan application you have make. If on the CIBIL score sheet a number of such entries appear the credit officer of the institution may get an impression that the applicant has applied for the same loan at several places and his chance of getting a loan approval diminishes.

    • Vikas February 16, 2014, 3:40 PM

      Apurva,

      If you have queried many institution for availing a home loan, then it will not be taken in a negative sense as the credit officer will understand that you are bargaining for a good deal. Its only when you query for multiple loans from different institutions then those queries may reflect negatively on your credit behaviour.

  • Mac January 31, 2014, 2:30 PM

    Hello Hemant,

    A good comparision and analysis of the credit score myths.

    It will also be interesting to see if there is a genuine and better way to manage the bad credit scores.
    If you run through a google search you can see lot of banks and credit cards unlawfully minting money from customers on pretext of erasing bad scoring earlier made to cibil. However most of it end up not improving

    • KRANTIVIR RAJPUT January 31, 2014, 3:41 PM

      YES, you are right. Only the person who needs to sort out the BAD CREDIT can do it for himself by just going through his CIBIL Report (Rs.470/- cost) and paying all the dues, proper written communication, followups with the concerned institution he/she can clear out with ease.

  • Sumit Nathany January 31, 2014, 7:16 PM

    Credit Rating Institution (CIBIL) does have information regarding our salary. I checked my credit score a few weeks back and it was showing my approximate salary (as mentioned in their records, actual salary may differ).

    • Vikas February 16, 2014, 3:32 PM

      Sumit,

      May be since you declare your income while availing loans and credit cards, the income details get shared when the report is given by the institution to CIBIL. But salary does not impact your credit score.

  • Vamshi Gupta January 31, 2014, 8:22 PM

    Statement in point “CIBIL has a cut-off score for credit institutions –> It gives a score based on your credit repayment history and the financial institutions”.
    is contradicting with point “Increased usage of credit card will lead to a higher credit score”

    High usage of credit cards does not lead to change in your credit score, as CIBIL does not have any information on individuals monthly payment history.. then how does , than how does CIBIL gives a score based on individual credit repayment history

    • Vikas February 16, 2014, 3:07 PM

      Vamshi,

      A good repayment history of your credit cards or loans surely makes your credit score positive. What the statement means is that whether you use 1 credit card or 3 credit cards does not necessarily impact your score. Its only when you default in your repayments then high number of credit cards will show an increase repayment burden because of high current balance and it starts impacting your score negatively.

  • Kirti February 1, 2014, 4:46 AM

    Good to see you back and with a bang.
    Good points. Many of us have these myths
    Approximately In How much time can a bad score be improved?

    • Vikas February 16, 2014, 2:43 PM

      Hi Kirti,

      Generally, once you have clear your outstanding and show a good credit repayment without any default, then in a year or so you should start seeing an improvement in your score.

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