Credit Score – What Are the Myths & How Is Your Score Calculated?

Your credit report is a financial record of your credit history. It shows how you manage and repay your debts. The report contains the note of when and how the bill repayments must be made. Also, it shows the debt you have and how long you have been managing your credit account. Lenders review your credit report to learn about your previous borrowing experience. Such reports help lenders make decisions about granting credit. Also, credit reports assist in deciding your credit score. Moreover, they assist in verifying your identity and for other purposes within the prescribed limits under the law. All top credit rating agencies in India prepare credit reports based on specific parameters. The info in the report is more or less the same. However, the manner each credit bureau shows the data varies. Read on to know some of the misconceptions linked with credit score –

Credit score and credit report are the same 

A credit score is nothing but a numeric representation that shows your credibility. The credit score is determined upon considering different parameters with respect to debt repayment and credit profile. Additionally, a credit score is just a part of the credit report. A credit report covers your entire credit history in relation to credit cards and loans. 

You cannot receive credit if you do not have it already

Lenders mostly check your credit history and credit score before granting you credit. They mostly fetch your online credit score generated by the top credit bureaus. However, where there’s no established credit history of yours, you can always reach out to someone to co-sign or authorize the loan. For instance, if there is no one to authorize or co-sign the credit, you can always avail a secured credit card. A secured credit card needs you to put your funds as collateral or security. Using a credit card, you can establish a strong credit history. 

Your credit score is the only determinant of your potential to avail a loan or credit card 

Many misinterpret that your credit score is the only parameter that decides your potential to secure a debt. Thus, an understanding of credit scores is necessary here. Credit score and credit report often is the first parameter that lenders factor in before approving your credit. However, various other parameters have a massive bearing on the lending decision – for instance, the lender’s internal parameters like employment, debt to income ratio, etc. Thus, a high and sound credit score does not necessarily assure your loan approval. Likewise, a low credit score does not always assure denial of a new credit application. 

Checking your credit report has a negative impact on your score

Reviewing your credit report does not have any negative impact on your score. Reviewing your report, in fact, is categorized under the section of soft enquiry. Soft enquiries have zero impact on credit scores. The credit scoring model does not factor in the soft enquiries. Thus, it is important to check your credit report at least twice a year. 

Using a credit card may affect your credit score

It is a popular myth that using a credit card has a negative impact on your credit score. However, it is just true when you miss out or default on your repayments. In such a case, your credit score has a massive impact. Moreover, using credit cards in a disciplined manner can help in forming a strong credit history. This ultimately can result in a good credit score. 

Cancelling a credit card ameliorates your credit score

Cancelling or closing your credit card will not assist in ameliorating your credit score. It may instead lower your credit limit, which in turn can enhance your CUR (credit utilization ratio). An enhancement of your CUR to over 30 per cent may result in a reduced credit score. 

An employer has the liberty to check your credit score

In India, checking credit scores by employers is not a popular practice. However, the employer may check your score upon receiving your approval. These enquiries are addressed as soft enquiries, which do not impact your credit score in any way. 

Job profiles, education level and a high income, can impact your score

Job profile, qualification and income do not have any effect on your credit score. The credit report does not capture these details. A credit report only has details linked with your debt, i.e., your credit card and loan accounts. Additionally, the credit report does not have any certificate of savings accounts, deposit accounts, etc. 

How’s credit score computed?

Every credit information bureau has its set of algorithms to compute your credit score. This means all 4 credit bureaus factor in different parameters to compute your credit score – 

Loan repayment history

Your loan repayment history has a massive impact on your score. A credit bureau keeps a monthly record of all your repayments towards loan EMI and credit card dues. A single missed payment or non-repayment of your bill can drastically decrease your credit score. 

CUR (credit utilization ratio)

CUR is the measure of using the available credit card limit. The higher the CUR, the more will be the impact on your score. Having a CUR of over 30 per cent lowers your credit score. Ideally, you must keep a CUR of less than 30 per cent to maintain a strong credit score. Moreover, for used credit, you must ensure timely credit card and loan repayments. 

Mix of credit

Your credit type also impacts your credit score. Having a balanced credit mix boosts your credit score. A balanced mix means an adequate credit mix of secured and unsecured loans. Having a higher unsecured loan may drag your credit score down. 

Credit duration

The duration of a specific credit line is crucial while computing your credit score. The older your credit card or loan is, the higher will be your credit score. This indicates you are a responsible individual who ensures to make timely repayments of dues in full.

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