Doctor triumphs in credit card lawsuit, sheds light on credit score myths and facts

Your credit score serves as a numeric reflection of your creditworthiness, indicating to lenders your likelihood of repaying borrowed funds. Given its pivotal role in various financial aspects of your life, it’s crucial to protect it diligently.

Abeer Ray
First Published25 Jun 2024, 10:56 AM IST
Guard your credit score well to secure your financial health.
Guard your credit score well to secure your financial health.

Do you recall the incident where a South Mumbai doctor clashed with a bank because they didn’t update his credit card payment, resulting in a significant drop in his CIBIL score? Economic Times reported how this oversight also led to additional interest and penalties due to the supposed non-payment.

Dr. Bhalla’s creditworthiness was severely affected by the incident, hampering his access to credit. He pursued legal recourse and successfully resolved the case. This situation is not unique, as many individuals frequently suffer from credit card issues caused by errors and unnecessary complications, resulting in significant personal and financial repercussions.

Many fail to grasp the significance of credit scores and their enduring impact on credibility. Regrettably, a strong credit score is often undervalued. Primarily, a high credit score enhances approval prospects for loans such as mortgages, car loans, and personal loans. Moreover, it secures lower interest rates, translating into substantial long-term savings. Conversely, a lower credit score yields contrasting outcomes.

Also Read | Doctor wins legal battle: Why regularly checking your credit score matters

In the present day, understanding and managing your credit score effectively is crucial for improving your credit opportunities. However, prevalent misconceptions frequently lead to financial errors. Numerous misconceptions have been spread about it. Here are some common myths and facts about credit scores to guide you in effective credit management:

Myths surrounding credit score

Checking your credit score lowers it: Many people mistakenly believe that checking your credit score can lower it. However, in reality, checking your credit score is considered a soft inquiry and does not affect your credit score. It’s only when lenders perform hard inquiries, typically during credit applications, that your score might experience a slight, temporary dip.

Getting rid of your old accounts improves your score: Closing an old account with a good credit history can negatively impact your score in several ways. Firstly, credit bureaus consider your average credit age, which reflects the length of time your credit accounts have been open. Closing an older account reduces this average, potentially lowering your score.

Likewise, closing a credit card reduces your overall available credit limit. Continuing to spend the same amount on credit will increase your credit utilization ratio, which may lower your credit score.

Also Read | How does regular credit card usage affect your credit score over time?

High income equates to a high credit score: Your income contributes to your eligibility for credit, yet it isn’t the predominant factor shaping your credit score. Your credit score hinges primarily on how responsibly you handle credit, such as ensuring timely payments and maintaining a low credit utilization ratio. These behaviors showcase your adeptness in managing credit prudently.

Having a consistent income enhances your ability to repay loans, although it doesn’t directly influence your credit score. However, fluctuations in income could result in missed payments, thereby impacting your score negatively.

Repayment of debt, even if left, improves your credit score: Paying off debt does not automatically remove it from your credit report. After you’ve settled a debt, it can stay on your credit report for up to seven years from the charge-off date, when the creditor stops pursuing payment. Nevertheless, there is a silver lining: even after a delinquency, consistently making timely payments on the debt following its charge-off can gradually boost your credit score. This underscores your dedication to prudent credit management.

Using a debit card contributes to building credit: That’s a common misunderstanding. Debit cards work by deducting funds directly from your checking account, so they don’t involve borrowing and repaying money like credit cards do. Because credit bureaus monitor your borrowing and repayment behaviors to evaluate your creditworthiness, debit card transactions are not reported to them and thus do not affect your credit score directly.

There is only one credit score model: You don’t have only one single credit score. There exist various credit scoring models, with the most prominent being FICO and VantageScore. These models might assign slightly different weights to factors such as payment history and credit utilization, leading to slight variations in your credit score.

Each of the three primary credit bureaus (Equifax, Experian, and TransUnion) maintains your credit report and computes your score based on the information in their possession. While the data they gather is generally consistent, slight discrepancies can occur, resulting in minor score variations among the bureaus.

Also Read | How to improve your credit score? Know it from experts

Facts that debunk credit score myths

You must monitor your credit score regularly: Consistently keeping track of your credit score is essential for maintaining strong financial health. Errors occasionally occur, and inaccurate information may inadvertently appear on your credit report. Regularly checking your score enables you to detect these inaccuracies early and promptly dispute them with the credit bureau.

Keeping an eye on your credit score can assist in identifying indications of identity theft or fraudulent actions. If you notice unfamiliar accounts or inquiries on your report, you can take immediate action to resolve them. Also, frequently checking your score enables you to observe its progress as you responsibly manage your credit. This progress can serve as a strong motivator to stay committed to your financial objectives.

Payment history is the most significant factor: Your credit score is most heavily influenced by your payment history. Consistently making timely payments is the most reliable indicator of your creditworthiness to lenders. It showcases your capability to handle debt responsibly and fulfill loan obligations as agreed. By making on-time payments a priority across all your credit commitments, you can markedly enhance your credit score and open up improved financial prospects down the road.

You must focus on your credit utilization ratio: Your credit utilization ratio plays a crucial role in determining your credit score. The credit utilization ratio shows the proportion of your available credit limit that you are currently utilizing. A lower ratio indicates responsible credit management and avoids overextension. Typically, maintaining a credit utilization ratio below 30% is recommended for achieving a good credit score. However, ratios below 10% can be even more advantageous.

You can improve your poor credit score: A poor credit score does not signify the end of possibilities. Improving your score hinges on practising responsible credit management, such as consistently paying all bills on time, including credit cards, loans, and utilities.

Building and enhancing your credit score requires patience and consistency in practising responsible credit management. By staying diligent, you’ll experience gradual improvement over time. It’s also important to regularly review your credit report for errors and promptly dispute any inaccuracies with the credit bureaus.

Your credit score holds significance beyond just obtaining loans: Your credit score impacts more than just your ability to secure loans. It can also affect other financial aspects such as insurance premiums, rental agreements, utility bills, and other decisions surrounding finances.

Understanding these myths and facts empowers you to make informed decisions in building and sustaining a healthy credit score, ultimately enhancing your financial well-being over time. A good credit score not only reflects your financial responsibility but also unlocks opportunities across different facets of your life. By recognizing the significance of your credit score and implementing effective management strategies, you can lay the groundwork for a more stable and prosperous financial future.

 

 

 

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First Published:25 Jun 2024, 10:56 AM IST
HomeMoneyPersonal FinanceDoctor triumphs in credit card lawsuit, sheds light on credit score myths and facts

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