Credit score is a 3-digit number that a credit bureau calculates to define an individual’s credit worthiness. Banks, lenders, and credit card companies rely on this number to determine your standing as a borrower. Lenders treat this score as an indicator of the risk in extending credit to you. Ranging from 300 to 900, a credit score of over 750 is considered good by most lenders. However, the higher the credit score, the higher are your chances to get a loan at a favorable interest rate.
However, there are some misconceptions surrounding credit scores. We’ve compiled a list that will help you understand how credit score and credit bureaus work in a better manner. Read on.
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Credit Bureau Does Not Publish Any Defaulter’s List
A common misconception is that the credit bureau maintains and publishes a defaulter’s list, based on which it approves or rejects the loans. This is false. The fact is that the credit bureaus do not publish any such list. They have records of your credit history, your open and closed, accounts, your credit cards and payments, and any loan enquiries you make which are only made available to registered lenders on request, this request has to be supported by a permission from you or a valid application for credit from your end with the lender.
The credit bureau only calculates your credit score based on your credit history and other algorithms. Credit bureau also does not hold any right to reject or approve your loan application, as it is solely based on the lender’s evaluation of your creditworthiness.
Not having a Credit History is Not the Best option
Many people believe that if they have never taken a loan or credit instrument, they would have a clean credit history and will be preferred by loan providers. This is incorrect. Many lenders prefer a borrower with a strong credit history rather than the one with no record at all. If you have no credit history, the lender does not have any idea about your spending habits and financial management. So, they may be hesitant in extending you credit in any form.
Credit Bureau Cannot Make Alterations in the Credit Report
Some people think that the credit bureau can make changes in their credit report to improve or reduce their credit score. But that is incorrect again. Credit bureaus do not have any power to make changes to your credit report. Your record is supplied by your bank or financial institute that maintains the information about your credit history. A credit bureau is only responsible for updating your records and making the necessary changes. They cannot make any alterations at their will.
High Credit Score Does Not Assure Loan Approval
Many people have a misconception that a high credit score is enough to get loan approval. However, that is not true. A credit score of 750+ can increase your chances of getting a loan approved, but it is not the only deciding factor. Lenders consider several other factors while screening your loan application, including the following:
- Age, which should not be too low or too high
- Income, which should be sufficient to incorporate loan EMIs
- Employment history, which must indicate that you have a steady job with regular income
- Other debts you owe, as applicants under heavy debt have higher chances of defaulting
- Debt-to-income ratio, which means your total loan EMIs should not exceed a set percentage of your total income
- Recent loan queries, as too many may indicate that you are in dire need of money and may default in future
So, if you have a high credit score, don’t assume that your loan will be approved. Stay ready with other factors also to maximize your chances of approval.
Credit Score Can Be Improved
Many people feel devastated when their credit score takes a hit. They think that once it goes too low, it cannot be improved and they will not be avail to avail credit any longer. But that’s not true at all. Credit score is calculated based on your credit obligations, repayment behavior, and financial management skills.
Even if you had to miss a few payments due to a financial crunch, you can bounce back and improve your score by making your payments in time. Here are a few other tips that can help in improving your credit score:
- Make your payments on time
- Identify errors in your credit report and get them corrected
- Maintain old accounts instead of closing them
- Avoid applying for a new debt
- Diversify your credit mix
- Increase your credit limit
Checking Credit Score Does Not Affect It
Making loan queries can affect your credit score, but checking your credit score does not have any such effect. You can check your credit score for free without worrying about reducing it unnecessarily. Getting a credit report from your bureau and disputing any errors also do not affect your credit score. In fact, getting any valid errors eliminated from your credit report can actually improve your credit score. So, don’t be afraid of checking your credit score and credit report, as doing that will only help.
Your Assets and Earnings Have No Effect on Your Credit Score
Credit score reflects your financial transactions in terms of credit. No matter how little you earn, if you make your payments on time and never miss them, you may have a higher credit score than a person who earns much more than you.
Credit score plays an immense role in determining your creditworthiness. You need to have a score of at least 725 to apply for a loan. But remember, a high score does not assure loan approval and a low score does is not the end of the world. But getting misconceptions cleared can point you the right direction to take the next steps. Check your Experian credit score here for free and see where you stand.
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