If Ravi wants to purchase a bike worth ₹1,50,000 and applies for a loan. However, his application was rejected because his credit score is just 580; most lenders require at least 750. Confused, Ravi discovers that his score has dropped in the belief that some myths—not counting paying off his oldest credit card—would help improve his score. Ravi is not alone: nearly 72% of Indians do not know how credit scores work, and 1 in 5 loan applications is rejected because of low scores.
Understanding credit scores helps avoid such situations. Let’s break down some common myths with real-life examples and numbers:
Myth 1: Checking Your Credit Score Hurts It
People believe checking their credit score lowers it, but that’s a myth. The checking of your own score is a soft inquiry and doesn’t even touch your credit score. When a bank or lender checks your score for your loan application, it’s a hard inquiry, which is going to lower your score a bit.
For example, in 2023 reports said that a hard inquiry lowers score by 5-10 points. Arjun can see his credit score on a free app available monthly, so his credit score remains at 750. Once he applied for a car loan, his score after the bank’s hard inquiry was about 742.
Myth 2: Everyone Has the Same Credit Score
Some people think there’s just one universal credit score for everyone. This is wrong. Different companies, like Experian, Equifax, and TransUnion, calculate credit scores using their own rules. So, your score might vary depending on which company you check.
Example: Ramesh checked his score with Experian, and it was 750. He later checked it with TransUnion, and it showed 735. Both are good scores, but they’re not the same.
Myth 3: Closing Old Accounts Improves Your Score
Many think closing old credit cards boosts their score, but it often hurts them. Closing an account reduces your total credit limit, increasing your credit utilisation ratio, which can lower your score.
Example: Meena had two credit cards with a total limit of₹1,00,000 and used ₹20,000, keeping her utilization at 20%. After closing one card with a ₹50,000 limit, her utilization jumped to 40% (₹20,000 out of₹50,000), lowering her credit score.
Myth 4: All Debt Is Bad for Your Score
Not all debt is bad. Managing different types of loans, like a home loan or car loan, responsibly can improve your score. It shows lenders that can handle credit well. The key is to make timely payments and keep balances low.
Example: Rahul has a ₹5,00,000 home loan and pays the EMI on time every month. This helps his score grow. But his cousin Sameer delays payments on his credit card. As a result, Sameer’s score goes down.
Myth 5: A Bad Credit Score Lasts Forever
A bad credit score can feel like a curse, but it’s not permanent. Your score changes based on your financial habits. If you pay your bills on time and reduce debt, your score will improve.
Example: Ananya had a low score of 600 last year because she missed some payments. She started paying on time and reduced her credit card balance from₹1,00,000 to₹20,000. This effort raised her score to 720 in just one year.
Conclusion
Believing these myths can lead to financial mistakes. By understanding how credit scores work, you can make smarter choices. Always check your score regularly, use credit wisely, and pay your bills on time. Remember, even small steps can lead to a big improvement in your credit score.
Fun Fact: Did you know? Nearly 80% of Indians don’t check their credit scores regularly. Be different—start checking yours today!
