A credit score lets lenders know whether or not you are a responsible borrower. While most people think they know everything they need to know about credit scores, majority have been blinded by the rampant misconceptions surrounding the calculation of the scores. There are a number of things that your credit bureau and creditors may be aware of that they might not have shared with you. This article will primarily focus on debunking some of the widely believed myths in the credit industry.
Popular misconceptions in the credit industry
People are generally under the impression that paying off outstanding debts will immediately enhance the CIBIL score. However, that is not the case. Paying all your bills can improve credit score and show lenders that you can keep up with the payments but it does not impact the credit history. Lenders will look at the overall credit history when determining whether or not to lend funds. In case you have had trouble with poor credit in the past but have worked to improve it then it will show lenders that you were able to get back up and pay all your expense.
Another popularly believed misconception is that closing your accounts will not affect your credit score. Closing an old credit card that you may not be using could definitely hurt your score. It will have an impact on the utilization ratio. The only condition under which you should close the card is when your utilization ratio is in a good state. Otherwise you are just hurting your score. Also keep in mind that closing a credit card will not wipe off its history from the report.
Failing to check your credit report because you think paying the bills on time is all it takes to improve credit score is one of the biggest myths in the industry. Paying the bills on time is necessary, but so is keeping an eye on the report. You may be unaware of some false data that has crept up in your report as your focus was only on timely payments. Any kind of false data on the credit report could ultimately affect your credit score. Additionally there is a rise in the number of identity theft cases in recent times. Your details could be stolen in such a case and the fraudster could open different accounts in your name. Hence it is very important to regularly check the credit report and credit score.
Some are of the opinion that credit scoring will invade their privacy. It is important to note that credit scoring will assess the same details that financial institutions look at. This includes application for credit, credit report etc. Financial institutions using credit score may at times ask the applicant fewer details. But most people don’t know how to check cibil score!
Unlike popular belief, when you apply for a new credit your score is not going to drop down immediately. In case you are applying for cards from different credit card companies in a short duration of time then the credit inquiries from the credit card companies and other financial institutions will be shown in your report. Seeking new credit from credit card companies and other financial institutions can be seen as increased risk; however, scores are usually not impacted by inquiries on mortgage or auto applications. They are sometimes bundled as a single inquiry.
It is important to note that when you co-sign another person’s new line of credit, you are just as much responsible as the person you have co-signed for. Do not be under the impression that once you have co-signed then you are no longer responsible. If the individual were to miss a payment, defaults etc. then it affects you as well. Hence it is very important to study the report of the other person you are co-signing for and make sure you understand all the risks involved.
Sometimes people think that a good credit score is all it takes to attain funds from lender. This is far from the truth. Lenders look at a bunch of parameters when deciding to lend the money or not – and credit score is just one such parameter. They may look at your employment history, income, how much debt can you carry etc. The parameters vary from one lender to another. Depending on all these parameters, the lenders will decide whether or not to extend funds. Sometimes they may extend credit to applicants with poor scores or they may deny credit even when the score is high.
written by Arun Ramamurthy, author of “Unlock the Power of Your Credit Score” : India’s first book on credit scores