There are three ways to classify a piece of information – truth, lies and myths. A myth is nothing but a popular belief which is miles away from fact. It is simply a lie disguised as truth in the minds of the people.
There is nothing more harmful than a financial myth. With the increase in awareness about Credit Scores and Credit Reports, there has been a rise in the myths surrounding them as well. Today, we will debunk 10 common myths about your Credit Score and Credit Report that can adversely affect your finances and future credit needs. Let’s get started!
Myth 1: Credit Score is the only important factor in a Credit Report
A Credit Report contains information about your personal details, credit history, bill payment details, account transactions and much more. While your Credit Score is an important piece of information on the Credit Report, it is not the only thing that one needs to check in a report. Lenders check your credit history before sanctioning loans. You should check account transactions to track if there is any suspicious activity involved. While your Credit Score is important, you have to pay heed to other things too on your Credit Report, got it?
Myth 2: Income affects my Credit Score
It is a popular belief that a low income leads to a bad Credit Score. But you would be surprised to know that your Credit Score has nothing to do with your income. Yup! In fact, your income doesn’t even feature in the Credit Report. The only way an income can affect the Credit Score is when you don’t earn enough to pay the bills. In this case, the inability to pay your bills is the reason for a drop in Credit Score and your income is not to be blamed.
Myth 3: Checking your Credit Report reduces your Credit Score
Most people stay away from checking their Credit Report assuming that it would lower their Credit Score. Obviously, this myth is ridiculous and untrue as no person should be penalised for checking his/her own Credit Report. When you pull your Credit Report, it is called a soft enquiry and it has no effect on your Credit Score. However, when a lender checks your Credit Report, it is called a hard enquiry which leads to a slight drop in the Credit Score for a temporary period. So, check your Credit Report before you apply for credit. This move could save you from any negative impact on your Credit Score.
Myth 4: No Credit = Good Credit Score
A Credit Score is calculated by keeping many factors in mind, especially your credit history i.e. the loan that you borrowed and how you repaid the dues. While timely payment boosts your Credit Score, late payments pull it down considerably. But if you have never applied for credit before, then your credit history will be nil. No credit or bad credit have almost the same chances of getting new credit.
Myth 5: Closing multiple Credit Cards improves your Credit Score
The truth about closing Credit Cards is contrary to the myth. Credit Utilisation Ratio plays a huge role in calculating the Credit Score. This ratio is defined as the amount of Credit Card expenditure compared to the credit limit. So, when you close multiple Credit Cards, your credit limit decreases considerably but your Credit Card debt is still intact. Thus, your Credit Utilisation Ratio increases. Higher the Credit Utilisation Ratio, lower the Credit Score. So, what should you do, you ask? You can consider paying off your Credit Card debt and keep the Credit Cards away instead of closing them, in order to improve your Credit Score.
Myth 6: Clearing debt will erase late payment or non-payment history from the Credit Report
While it is great that you have cleared off your debt, be aware that your credit history (good or bad) will stay on the Credit Report for up to 7 years depending on the credit information agency. So, if you ever made a late payment on a loan EMI or Credit Card bill, it is going to stay in the Credit Report for a long time irrespective of debt clearance. However, it affects your Credit Score for only less than 2 years.
Myth 7: Bad Credit Score results in no loan
While a low Credit Score can create problems for your loan application, it is certainly not the end of the road. There are banks and lenders that provide loans to people with a bad Credit Score with a collateral in the form of a property, Fixed Deposit, etc. Such loans are called secured loans and they can be availed irrespective of a good or bad Credit Score.
Myth 8: Credit Score is not important if you are not looking for credit
This statement is partly true, but it is completely ignorant of the fact that the building of a Credit Score is a continuous process. If you had a good Credit Score a year ago, it is not necessary that it would still be the same. By not giving a damn about your Credit Score since you don’t require credit, you are digging your own grave as a financial emergency could knock at your door anytime. The need for credit can arise suddenly out of nowhere and at that time you might regret not caring about your Credit Score. So, build it gradually, don’t ignore it.
Myth 9: Management of your bank accounts and investments impacts your Credit Score
This myth is completely untrue as neither the Credit Report nor the Credit Score has anything to do with bank account transactions and investments. Credit information agencies do not report income, savings account transactions, investment transactions, cash payment, etc.
Myth 10: Disputing a transaction will remove it from the Credit Report
To err is human and even Credit Reports contain errors sometimes. If you find some error with your credit history or bill payment transactions, make sure that you dispute it with the credit agencies. The agency will then investigate your report and credit history, and if they find errors it will be duly removed. However, if there are no errors with your transactions, then the information will not be removed.
Now that you are aware of the myths surrounding your Credit Score and Credit Report, be a wise borrower and follow healthy credit habits like paying bills on time, maintaining an optimal Credit Utilisation Ratio, checking your Credit Report from time to time, etc. It is time to cast aside myths and work along with facts towards improving your Credit Score.