You have often seen people talking about credit scores and credit reports and giving advice to each other and sometimes even heard people’s advice. We often try to follow the advice of experienced people, but sometimes due to lack of information in the matter of finance, the advice of people can be wrong. Because we are often surrounded by myths. Therefore, before implementing the advice of the people, we should take information about its truth and accuracy and should not always accept someone’s truth as long as you do not know the correct information. Similarly, you have kept many myths about credit score and credit report. So through this article, we are going to break these myths and tell you the truth.
Myth 1 – The only important factor in a credit report is the credit score.
A credit report contains information about your credit history, repayment history, bill payments, transactions, etc. Financial institutions look at your credit report before approving loan applications. On the other hand, credit score is a numerical form of this data. Since a credit report contains many important information, it is incorrect to say that a credit report only contains the credit score information. You should keep checking your credit report and correct it in case of any error.
Myth 2 – Income affects the credit score.
People often believe that the level of income affects the credit score. Along with this, people believe that credit card is only for high income individuals. But you would be surprised to know that credit score is not affected by income. When a credit report is prepared, income is also not considered a parameter. The credit score through income is affected only when you are unable to pay your dues on time. This can happen due to many reasons besides income.
Myth 3 – Checking a credit report lowers a credit score.
Most people do not check their credit report, as they believe this may lower their credit score. This is a big myth about credit scores. No person is penalized or banned from checking their credit score. There are two types of credit inquiry, hard inquiry and soft inquiry, which help the users to know about their credit status. You can do a soft inquiry with the help of various websites and aggregators. These websites and aggregators provide credit score information at no charge. Along with this, you can do a soft inquiry with the help of your net banking account, although there may be some minimum charges. Soft inquiries do not affect your credit score in any way. Conversely, hard inquiries made by banks can negatively impact your credit score.
Myth 4 – Not having credit means a good credit score.
Credit scores are calculated by credit rating agencies based on various factors such as repayment history, credit utilization ratio, past loans, arrears or loans. Also, factors like timely repayment and keeping the credit utilization ratio below 40% help to increase your credit score. Also, not paying the loan on time, the outstanding balance etc. negatively impact your credit score. But if you have never taken a loan or used a credit card, then you are a person with no credit history. Your situation is similar to a person with a poor credit score and in this situation both individuals have an equal probability of being accepted or rejected a loan application.
Myth 5 – Credit card closure improves credit score.
The credit utilization ratio plays an important role in calculating the credit score. In such a situation, closing your old credit card can have a negative effect on your credit score. Most credit rating companies monitor credit accounts and transactions made from these accounts. The longer the credit history of these accounts, the better it will be for you. Because credit rating agencies compare the total number of credit cards to the credit limit. In such a situation, if you close these accounts, then your credit limit decreases, but your expenses remain as before. In such a situation, you can use your credit card more than the credit limit and as a result your credit score may decrease.
Myth 6 – Due to late repayment of all your debts, information like late payment or non-payment is erased from the credit report.
Many people believe that repayment of old loans improves the credit report or erases previous information. But this is a myth. Because your credit report contains information about non-payment of dues for seven years. So if you ever make late payment of credit card dues or loan repayments, it will remain in your credit report for at least seven years.
Myth 7 – People with poor credit scores do not get loans.
If your credit score is average, sometimes you may face a loan rejection or you may have difficulty with a loan application, but this does not mean that you will not get a loan. People with low credit scores can take loans by keeping someone as a guarantee.