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Photo: iStock

Six myths around credit score reports you should not fall for

Your score could be affected by factors such as repayment discipline, credit utilization, size and type of loan and length of credit history. Here are six myths about credit scores you should understand to make informed decisions

Recently, when the Reserve Bank of India (RBI) extended the moratorium on repayment of term loans till 31 August 2020, it said that availing of the facility will have no adverse impact on the credit scores of borrowers.

A credit score is a three-digit number that reflects the creditworthiness of a consumer. “Lenders use the score to understand the probability of the consumer being able to repay the loan," said Ashish Singhal, managing director, Experian Credit Information Co. India, a credit bureau. Factors such as total debt, repayment history, credit utilization, credit type and total credit accounts determine one’s credit score. Typically, a score above 720 is considered very good and anything under 300 is considered very poor.

Your score could be affected by factors such as repayment discipline, credit utilization, size and type of loan and length of credit history. Here are six myths about credit scores you should understand to make informed decisions.

The first myth is that your income impacts scores. “A consumer who has high income but is not disciplined in repayments of loans may have a lower credit score compared with one with relatively lower income but who is more disciplined in making repayments," said Singhal.

Adhil Shetty, CEO, Bankbazaar, said scores reflect how much credit you utilize versus total credit limit and how well you manage it. “Despite loss of income in part or full, if you are able to pay your dues on time, your score won’t be affected."

Second, people believe that not taking loans can improve their score. In fact, no loan means you do not have a credit history. A credit report analyses how you manage your credit and the absence of it means there is no way a lender can understand your financial behaviour. “You could face challenges availing of any line of credit if you do not have a credit history. Build a credit footprint by ensuring timely repayment," said Singhal.

But this does not mean taking multiple loans will improve your score, the third myth. Multiple loans could imply you are credit hungry and multiple credit inquiries can have a negative influence on your credit score.

If you have multiple loans in your name but manage to repay them on time, you could have a higher credit score compared with someone with fewer loans but not a good repayment track record. “If your credit utilization is low and you are able to make all repayments on time, then your score needn’t fall," said Shetty.

Similarly, having multiple credit cards does not better your score. That’s the fourth myth. Having multiple credit cards could mean multiple bills and multiple payment dates, increasing the chances of default. “The more cards you have to keep track of, the more likely you are to forget about a payment, which will affect your score," said Wilfred Sigler, director, sales and marketing, CRIF High Mark.

Singhal said having too many credit lines, even if they are not used, can hurt an individual’s credit score by making him or her appear risky to lenders.

The fifth myth is that repaid debt won’t reflect on the credit report. All loans you held or closed in the last two-three years will show up on your report and, hence, impact your score. If there were delays in repaying your debt, that too will get reflected. Sigler said all your accounts would appear on the report, irrespective of whether it is paid in full or not.

The sixth myth is that RBI’s moratorium facility will impact the credit score. That won’t be the case as long as the data is reported by your bank. However, Singhal said loans will continue to attract interest even during this period and your total indebtedness will go up, which could impact your eligibility to avail new loans.

It is advisable to keep track of your credit report.

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