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Never had a loan or credit card? Your credit score may still not look great

Not having a borrowing history and signing as a guarantor can pull down your scores. Here are five common myths on credit scores dispelled for you

March 02, 2021 / 10:10 AM IST

The credit score plays a crucial role in our financial lives. Those with higher credit scores have a better chance of getting their loan or credit card applications approved. Additionally, several lenders using risk-based pricing for loans have started offering preferential interest rates and charges to those with higher credit scores. However, despite the rising significance and importance of credit scores, the lack of awareness has led to emergence of several myths surrounding them.

Let us discuss about some of the common myths associated with credit scores, which can ultimately harm your financial health.

Only loan or credit card applicants need to track their credit scores

Credit bureaus compute your score based on the loan and credit card related information shared by lenders and issuers. Any clerical errors or wrong information provided by the credit bureau or lenders can reduce your credit score. Similarly, any fraudulent credit application or transaction in your name can also reduce your credit score. The only way to prevent such information from harming your credit score is to review your credit report at periodical intervals. Doing so would help identify and rectify any error on time and prevent further damage.

You can get a free credit report from each of the four credit bureaus at least once a year. Alternatively, you can also visit online financial marketplaces to get your free credit report, along with monthly updates.

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Also read: Credit report: How you can access it for free and rectify errors

Fetching your credit report harms your score

Whenever you directly apply for a loan or credit card, the lender will access your credit report from the credit bureau to assess your creditworthiness. Such lender-initiated credit report requests are termed as hard enquiries, each of which will reduce your credit score by a few points.

However, self-initiated credit report requests placed directly with the credit bureaus or online financial marketplaces are considered as soft inquiries. They do not impact your credit score.

All credit bureaus list the same credit score

Lenders and credit card issuers have to share loan and credit card transactions with all the credit bureaus. This has led to the misconception that all credit bureaus would list the same credit score for a consumer. However, each of the four credit bureaus operating in India – TransUnion CIBIL, Experian, CRIF High Mark and Equifax – have their own credit scoring methodologies and they update the consumer’s credit report at different times. This can lead to variation in the credit scores across credit bureaus.

Also read: Why your credit score differs across bureaus

No credit history implies higher creditworthiness

Consumers often assume that those who never took loans or credit cards in the past are considered more creditworthy by lenders. However, the lack of credit history makes it difficult for the lenders to assess your creditworthiness. This reduces the probability of sanctioning loan and credit cards.

The best way to build a strong credit score without availing loans is to use credit cards and repay bills in full by the due date and maintaining a credit utilisation ratio within 30 percent.

Opt for a secured credit card if you fail to avail a regular credit card due to your income, job profile, location, etc. The broader features and benefits of secured credit cards are the same as regular credit cards except that secured credit cards are issued against your fixed deposits. Transactions made through secured cards are also considered by credit bureaus for calculating credit scores.

Also read: How many credit cards should you have?

Guaranteeing or co-signing loans does not impact credit score

Whenever you co-sign or become guarantor to a loan, it makes you equally liable for its timely repayment. Hence, any default or delay in the loan repayment by the primary borrower and co-borrower(s) will also adversely impact the credit score of the loan guarantor or co-signer.

Make sure you keep a close tab on the repayment activities in such loan accounts. Loan guarantors can also get their credit reports at regular intervals as any delay or default in the loan repayments will reflect in their credit reports as well.
Radhika Binani is Chief Product Officer, Paisabazaar.com
first published: Mar 2, 2021 10:10 am

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