A credit score is a score ranging from 300 to 900 that a credit bureau assigns to your profile based on your credit history. The higher your score is, the more creditworthy you are deemed by lenders. This is one of the most decisive factors that lenders look at before approving or rejecting your loan application. However, a lot of people lack complete information and are usually confused about the factors that affect their credit score.
While your credit score is affected by a number of factors, including your payment history, credit mix, amount owed, new credit, and length of credit history, there are certain misconceptions that are clarified below.
1. People Who Have Low Income Have Low Credit Score
It’s a common misconception to think that if an individual has a low income, they will have a low credit score as well. But that’s not true. Your income does not affect your credit score. Instead, how you handle the income against your credit is what helps in determining your score. There are individuals who may have a good income but cannot handle their credit properly and hence have a low credit score.
If you availed a loan in the past and have repaid its EMIs on time, you will have a good credit score no matter what your income is. However, some lenders require you to have a minimum salary to be eligible for their loans just to ensure that you will be able to repay the borrowed amount.
2. Not Paying Bills on Time May Reduce Your Credit Score
When we say that you have to pay your bills regularly to maintain a high credit score of 725 or above, we do not refer to your utility bills but your credit card bills. In India, credit bureaus do not take your utility bills like electricity bills and water bills into account while determining your credit score. Paying all your bills on time is the best practice, but they do not add to your creditworthiness. If you occasionally default or delay your utility bills, it will not count towards your credit score calculation. The same applies to your mutual funds, house rents, investment plans, and insurance premiums.
3. Checking Credit Score Repeatedly May Reduce It
If are planning to take a loan in the near future, you may tend to check their credit score every few days to keep an eye on it. It is a common misconception that checking credit scores repeatedly may negatively affect them. That’s not true! In fact, keeping tabs on your credit score is helpful, especially if you are trying to improve it to avail a loan.
When you check your credit score, it is considered a soft enquiry and does not count towards calculating your score. However, inquiries made by prospective lenders to whom you apply for a loan are called hard enquiries and will affect your credit score. If you apply for several loans at a once, it leads to several hard enquiries on your credit report and affects it negatively. It also poses you as a credit-hungry borrower that may drop your chance of getting a loan approval.
4. Using Multiple Credit Cards Holds Down Your Credit Score
Although using multiple credit cards does not directly affect your credit score, it may reduce your score if you are not consistent with your repayments. No matter how many credit cards you hold, if you are paying your bills on time, they will have no effect on your credit score. On the contrary, a person using only one credit card may also have a low credit score if he/she does not pay the bills regularly.
Using more than one credit card can actually help you, as it may increase your credit limit and reduce your credit utilization ratio. The more credit limit you have, the more credit you will be able to use without increasing your credit utilization beyond 30-40%. That’s why many experts even suggest holding on to old credit cards even if you are not using them, as this helps in retaining their credit limit and keeping the credit utilization ratio down.
5. Lenders Prefer Borrowers Who Have Never Applied for a Loan
Many prospective borrowers think that if they have never taken a loan and never used a credit card, they will be preferred by lenders when they apply for a loan. But that’s not true. Lenders want to look at your credit history before offering you a loan. If they cannot get an idea about how regular you are with your payments and what your financial habits are, they may feel less inclined to approve your loan. You must have a credit history to build a credit score and prove your creditworthiness.
Check your credit score and see where you stand.
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