Stop believing these credit score myths

Ranjit PunjaCreditMantriCredit score, credit information report, risk profile, credit limits, settled accounts and written off accounts…..many of these terms are not fully understood by many otherwise financially aware people. Credit scoring is only a little over 15 years old in India and is still shrouded in some amount of misinformation and mystery. Here are some familiar myths about credit scores that have become common currency and that you need to disabuse yourself about immediately. A blank credit slate, with zero or minimal prior loan or credit card applications, is a positive when applying for a loanOn the contrary, having a rich and long credit history spanning various types of loans is a big plus when applying for credit. If you have not applied for a loan before, or have only a single loan or credit card to your name, there is a good chance that your loan application will be turned down or, at best, that you will be approved with harsher terms and conditions. Why? When you apply for credit, lenders want to evaluate your repayment record across a long time frame and across multiple loans to see if you have demonstrated a consistent pattern of responsible repayment behaviour. If you have a minimal credit history, lenders do not have enough data to judge your risk for default and many will reject your application right away. If you want to apply for a substantial loan, like a home loan, it is a good idea to apply for smaller amounts of credit first (loans/credit cards) and make your payments on time so that you can build up a credit record. Credit scores improve with closing old accountsNot so. If you want to consolidate your credit accounts, it is better to close your newer accounts first. Shutting down old credit cards, even if inactive, shortens the age of your credit history and will have a negative impact on your credit score. If you have inactive old accounts, it is better to use them sparingly and responsibly rather than close them altogether. Appearing on the Credit Defaulters List will decrease your credit score and ensure loan rejection In reality, no Credit Defaulters List exists. No such ‘blacklist’ is shared among banks. If your loan application is turned down, it is because of a weak credit score or other credit –related issues that show up in your Credit Information Report (CIR), not because of a mythical list supposedly circulating among banks. A good income translates to a good credit scoreYour income has no bearing on your credit score. Your credit score is an indicator of your willingness to repay your debts on time and in full. If you fail to make credit card payments or EMIs on time, your credit score will be negatively affected, regardless of your income. Similarly, your education level, your job, your investments and other assets are not factors in calculating your credit score. Making a few delayed payments does not affect the scoreKeep in mind that every single time you miss or delay a payment, it is reported by the lender to the credit bureau. If you delay only the rare payment, it might have a negligible impact on your score. However, any more repeated transgressions will lead to a drop in your score even if you pay off the delayed or skipped payment in full later. Do not take due dates lightly – any delay is reported and can hurt your credit score later on. It is not rocket science to maintain a good credit score. It is easy to get caught up and confused about the terminologies used in credit reporting – however, remember that basic things like paying your bills in full, and on time, is a surefire way to make sure your score remains healthy.