Two friends, Naina, and Ravi were engrossed in a conversation linked with the topic – HDFC credit score importance. As they sipped tea at their favourite local café, the discussion turned into a myth-busting journey. Read on to understand the myths busted linked with credit score –
Myth: Having multiple credit cards hurts your credit scores.
Fact: A mix of credit types, including multiple credit cards, can be beneficial for your credit score.
Credit bureaus factor in the distinct kinds of credit you use when computing your score. Having a blend of credit involving loans, credit cards and mortgages can have a positive effect. It shows your potential to manage distinct kinds of credit responsibly, contributing to a more suitable credit score.
Myth: Closing credit card accounts improves your credit score.
Fact: Closing old accounts may lower your score; it’s better to keep them open to showcase a longer credit history.
The credit history’s length is an essential parameter in deciding your credit score. Closing old loan and credit card accounts can shorten your previous credit record, potentially impacting your score negatively. Lenders often see a long credit record as an indication of financial responsibility and stability.
Myth: Checking your credit score frequently lowers it.
Fact: Regularly monitoring your credit score is a good practice. It’s hard inquiries by lenders that may affect it.
Monitoring your credit score through legitimate channels, such as credit monitoring services or credit bureaus, is a responsible habit. These inquiries are considered “soft pulls” and do not impact your credit score. On the other hand, “hard pulls” made by lenders during credit applications can have a slight, temporary impact on your score.
Myth: Paying off all debts at once boosts your credit score.
Fact: While paying off debts is good, a gradual, consistent repayment history is more favourable than sudden, large payments.
Paying off debts is a positive financial move, but credit scores also consider your repayment history. Consistently making on-time payments over an extended period is more favourable than paying off all debts at once. It demonstrates a stable and responsible approach to managing credit.
Myth: A higher income guarantees a better credit score.
Fact: Your income isn’t directly linked to your credit score. Your financial habits matter more.
While a higher income provides more financial resources, credit scores primarily assess your credit management habits. Timely payments, responsible credit utilisation, and maintaining a positive credit history are crucial factors that influence your credit score, regardless of your income.
Myth: Settling debts for less than you owe has no consequences.
Fact: Settling debts may have negative consequences, and it can impact your credit score.
Settling debts, especially for less than the full amount, may be viewed negatively by lenders. It can be reported on your previous history, showing that the debt was completely repaid as agreed initially. This can have a lasting effect on your score.
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Myth: Only using cash helps your credit score.
Fact: Using credit responsibly, and making timely payments, positively influences your credit score.
While using cash may eliminate the risk of credit card debt, responsible use of credit is essential for building a positive credit history. Making timely payments and managing credit accounts wisely contribute to a favourable credit score.
Myth: Having a balance on your credit card ameliorates your credit score.
Fact: Making payment of your credit card balance in totality and on time is better for your score.
Having a balance on your card can lead to interest charges and does not necessarily benefit your score. Paying your balance in full and on time demonstrates responsible credit management and contributes positively to your credit history.
Myth: Your credit score does not impact your potential to get a job
Fact: Many employers check scores during the hiring process, linking an excellent credit score with financial responsibility.
An excellent score of 750 and above in the job market is often viewed as a reflection of financial responsibility. A few employers might check your score as a part of the hiring procedure, especially for positions involving financial responsibilities.
Myth: Your age does not impact your score
Fact: The length of your credit history matters; a long record can have a positive impact on your score.
Your previous credit record is an essential parameter in deciding your score. Older accounts contribute positively to your record, showing your potential to manage credit over a long time.
Myth: Settling debts erases them from your credit report.
Fact: Settled debts may still appear on your credit report, potentially affecting your score.
Even post settling a debt, it might stay on your report, showing the debt was not completely repaid as it was agreed initially. This can affect your previous record and consequently your score.
Myth: Closing a credit card immediately after paying it off is beneficial.
Fact: Closing your credit card might shorten your credit record, which may considerably lower your credit score.
Closing a credit card, particularly if it has been operative for a long time can lower the credit account’s age. This might hurt your score as a longer credit record is usually viewed as more suitable.
Myth: Making payment of utility bills on time can enhance your credit score
Fact: Utility payments typically don’t impact your credit score unless they go to collections.
While timely payment of utility bills is important for avoiding negative consequences like service disruptions, these payments usually do not contribute to your credit score unless they are sent to collections.
Myth: Bankruptcy ruins your credit forever.
Fact: While bankruptcy has a significant impact, credit can be rebuilt over time with responsible financial behaviour.
Bankruptcy has a considerable effect on your score, but it is not a permanent stain. Over the years as you demonstrate disciplined financial behaviour such as managing credit wisely and making timely repayments, you can better build your credit again.
Myth: CIBIL disputes are useless and time-consuming.
Fact: Raising a CIBIL dispute is crucial if you spot errors on your credit report; correcting inaccuracies is worth the effort.
If you view an inaccuracy in your report, it is necessary to address it via the CIBIL dispute procedure. Correcting issues can have a positive effect on your financial profile and score.
Myth: Unused credit cards should be closed to improve your score.
Fact: Unused credit cards contribute to your available credit, positively influencing your credit utilisation ratio.
Keeping unused credit cards open can contribute to a higher total credit limit, which can lower your credit utilisation ratio. A lower ratio is generally viewed positively by credit scoring models.
Myth: Paying rent on time improves your credit score.
Fact: In India, rent payments don’t typically impact your credit score unless reported to credit bureaus.
While paying rent on time is a responsible financial behaviour, in India, it may not directly contribute to your credit score unless your landlord reports the payments to credit bureaus.
