Credit score myths that can hurt your financial health
Maintaining a high credit score through responsible behavior is an ongoing process
A good credit rating is the key to your financial health because it can give you access to the best loan and credit card deals. 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 stay away from the bad ones. Here are some common myths about credit scores:
Checking my credit score frequently will lower it
When you apply for a loan or credit card, the lender gets your credit report from a credit bureau to assess your creditworthiness. This is commonly referred to as a “hard investigation”. Too many inquiries 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 yourself, it is a “soft survey”. Soft requests have no impact on your score. In fact, it is advisable to check your credit report every 2-3 months, track your credit score, and take steps to build it. Regularly checking your credit score can also help spot any errors that may appear on your credit report.
My score will improve as income increases
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 applications for loans and cards can seriously hurt your credit score regardless of your income. However, higher income impacts your overall loan eligibility because it reflects higher repayment capacity. Despite a good credit score, people with low incomes may not qualify for some expensive credit cards or loans.
Settling a credit account helps improve credit score
Paying your loan or credit card account is different from closing your loan or card account. Closing an account means the deactivation of a loan or credit card after full reimbursement of unpaid contributions according to schedule, with no outstanding amount remaining.
When a person is unable to pay the unpaid amount for a period of time, the lender can choose to extend the settlement option of the account through a one-time payment option, where a certain amount of debt can also be removed.
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 know that this “settled” account stays on your credit report for a long time and that all of your future loan or credit card applications will likely be affected.
Because you missed your payments on schedule and paid off, lenders will see you as an “at risk” borrower in the future and may be reluctant to approve your loan or credit card applications.
The banks will lend me because I never took credit in the past
Many people assume that not having a loan or a credit card can make it easy for them to get credit because they don’t have any existing credit obligations to meet. It’s not correct. Having active credit accounts and showing good repayment behavior towards them is a positive sign for lenders.
If you have performed well on your credit obligations in the past and continue to do so, your risk of default in the future is relatively lower and you can get credit approved with better deals and lower 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 score, making 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. Having no credit history, providers have no data to analyze the credit risk provided to new credit applicants. Many major lenders refrain from approving the credit applications of these applicants. If you are new to credit, you also miss out on pre-approved loans and card offers from various lenders, aside from several perks like preferential rates.
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 rating.
Before closing an old credit card, there are a few things to consider.
Firstly, it is 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 you apply for a loan or credit card, and having a credit card here with a long history and good repayment history can help. So, if your credit history with other credit products is not very long, it is recommended that you continue with an old credit card.
Also, keep in mind that when you close a credit card, your credit limit goes down, which can lead to a higher credit utilization rate that would negatively impact your score.
(The author is Chief Product Officer, Paisabazaar.com)