Credit score

Credit Score Myths That Can Harm Financial Health

Maintaining a high credit rating through responsible behavior is an ongoing process

Maintaining a high credit rating through responsible behavior is an ongoing process

A good credit score is key to your financial health, as it can give you access to the best loan and credit card offers. However, building or maintaining a high credit rating through responsible behavior is an ongoing process. You have to be aware of the “good and desirable” actions that have a positive impact on your credit score and avoid the bad ones. Here are some common myths about credit scores:

Myth 1

Checking my credit score frequently will lower the score

When you apply for a loan or credit card, the lender retrieves your credit report from a credit bureau to assess your creditworthiness. This is commonly referred to as a “thorough investigation”. Too many difficult requests from lenders in a short period of time can lower your score, as it indicates a thirst for credit.

However, when you check your credit score on your own, it’s called an “informal inquiry.” Informal requests have no impact on your score. In fact, it’s a good idea to check your credit report every 2-3 months, track your credit score, and take steps to build it. Checking your credit score regularly can also help catch errors that may occur in your credit report.

Myth 2

My score will improve with increasing income

Your credit score is determined by your behavior with credit and is not tied to income. Missing EMI repayments, high credit utilization rate, frequent and multiple loan and card applications can seriously hurt your credit score, regardless of your income. However, higher income has an impact on your overall loan eligibility, as it reflects higher repayment capacity. Despite having a high credit score, low-income people may not qualify for some expensive credit cards or loans.

Myth 3

Credit Account Settlement Helps Improve Credit Score

Settling your loan or credit card account is different from closing your loan or card account. Closing an account means deactivating a loan or credit card after full repayment of unpaid dues on schedule, with no outstanding balance.

When a person is unable to pay the outstanding amount for a period of time, the lender may choose to extend the account settlement option through a single payment option, where a certain amount of debt may also be struck off.

When you decide to settle your credit account, the credit bureaus are notified; this begins to reflect on your credit report as a “settled” account. You should be aware that this “settled” account stays on your credit file for a long time, and any future loan or credit card applications may be negatively affected.

Because you missed repaying on schedule and settled the account, lenders will consider you a “subprime” borrower in the future and may be hesitant to approve your loan or credit card applications.

Myth 4

The banks will lend me because I never took credit in the past

Many people assume that not having a loan or credit card can make it easier for them to access credit because they have no existing credit obligations to fulfill. It’s not correct. Having active credit accounts and displaying good repayment behavior against them is a positive sign for lenders.

If you have met your credit obligations well in the past and continue to do so, your risk of default in the future is relatively lower and you can get approved for credit with better offers and at preferential rates. . On the other hand, indiscipline in credit management in the past makes you a risky customer and the bureaus give you a low credit rating, which makes it difficult to get loans and cards.

But, if you’ve never taken out a loan or a credit card in your life, you have no credit history. The absence of a credit history leaves suppliers without data to analyze the credit risk granted to new credit applicants. Many large lenders refrain from approving credit applications from these applicants. If you are new to credit, you are also missing out on pre-approved loans and card offers from various lenders, in addition to several benefits such as preferential rates.

Myth 5

Closing old credit cards is good for my credit score

We often tend to close old credit cards to save annual fees or simply because we no longer use them. However, this may not be advisable if you don’t have a long credit history, haven’t used many credit products, or have a low credit score.

Before you close an old credit card, consider a few things.

First, it’s always good to have a good mix of credit products in your portfolio, as it shows your ability to handle different types of credit. So, before you close an old credit card, take a close look at the account total on your credit report. If you haven’t taken too many credit products, you may want to continue with the card for a stronger product mix.

Second, lenders look at the length of your credit history when applying for any type of loan or credit card, and having a credit card here with a long history and a good repayment record can help. So if your credit history with other credit products is not very long, it is recommended to continue with an older credit card.

Also keep in mind that when you close a credit card, your credit limit decreases, which can lead to a higher credit utilization rate which will negatively impact your score.

(The author is Chief Product Officer, Paisabazaar.com)