An individual’s credit score is his/her worth to a bank. The higher the worth, the easier it is for the person to take a loan. Not just that, the individual can take as high a loan as he wants. All that is needed is a good credit score. However, credit score, for some, is a black art. The reason for that is simple – they don’t know how credit score is evaluated. To understand that, we will have to first talk about what does not affect credit score rating. To do that, we have to debunk some myths. So, today, we are going to debunk some credit score myths. After today, credit score will hopefully no longer be a black art to you at least.
Debunking Credit Score Myths
Myth 1: Zero score = Best score
A person’s credit score stays zero till the time he/she does not take a loan/advance. The problem is that many folks believe that not taking a loan or a credit card (advance) will keep their credit score healthy. If you are not involved in any credit transactions, how will the bank know your worth? If a bank does not know your worth, it will not inform the credit agency of the same. Since the credit agency does not know your worth, it will not score you. In the absence of a credit score, securing a loan is quite difficult.
Myth 2: Less old accounts = Better credit score
To improve your credit score, you will look to close old credit card accounts. However, over time, you become wise and hence, a better manager of your finances. In such a case, instead of having new credit card accounts, focus on having old ones managed in a better manner. If you wish to close credit card accounts, close the recent ones as they do not reflect your credit history. Old accounts reflect your credit history and hence, are important for a good credit score.
Myth 3: Defaulting on payments = Bad credit score
Don not take it otherwise in any way. Defaulting on your credit card bill payments or EMIs is not good. A rare payment default will not harm your credit score. However, rare means rare. As soon as payment defaulting becomes a regular practice, your credit score starts going down. In the end, unless something too important comes up, never default on a credit card/EMI payment.
Myth 4: Existence of a defaulters’ list
If you think that there exists a credit defaulters’ list, it does not. No such lists exists for now that you should worry about. However, that does not mean that banks will ignore your low credit score. Keeping an eye on your credit score is your responsibility. Just because one person does not pay his/her dues on time does not mean the credit agency has to resort to extreme measures for the same.
Myth 5: Good income = Good score
Let’s say you earn Rs 1 lakh a month. That does not mean you will automatically get a high credit score. For that to happen, you will have to take a car loan/home loan or a simple credit card. These are the instruments that enable a bank to assess your credit-worthiness. This, in turn, affects your credit score that CIBIL maintains in India.
Debunking Credit Score Myths – Conclusion
In the end, your credit score is always determined by your timely EMI/credit card bill payments. These are the only ways a bank knows it can trust you with more money. When it conveys this to CIBIL, your credit score goes up. The above myths are the biggest ones when it comes to a person’s credit score. Do ensure you pay your EMIs/credit card bill payments on time and live easy.