Due to lack of knowledge, many myths about credit score keep spreading. People find it difficult to verify the validity and applicability of these myths and rumours. However, believing in the myths can lead you to trouble at times. Therefore, here is a compilation of the most popular myths and a reality check on them.
1. Checking Credit Report Hurts Your Score
You checking your credit report will not hurt your credit score at all. If numerous lenders enquire your credit details within a short span of time, it could hurt your score and give a wrong impression to the prospective lender. It is a good habit to keep a track of your credit report and score at regular intervals of time, say once every 3-6 months. It will give you a reality check and gives you scope to improve your financial behaviour if required.
2. A Bad Credit Score Lasts Forever
A credit score is a representation of your financial past. However, it does not mean that once you get a low score, it will stay with you for a lifetime. You can try and build a good credit history, in turn, a good credit score over time. If you make a habit to follow all the good practices and tips, you can build a good score and let the past bad transactions fade away.
Usually, a transaction stays in your report for about two years. Details such as bankruptcy and payment defaulting may stay up to 10 years. However, there is still hope for improvement.
3. Credit Score Depends on Your Annual Income
A credit score does not depend on your annual income. You can have a score of 816 even if your annual income is Rs.5 lakh. Similarly, it is also possible for a person with an annual income of Rs.10 lakh to not have a credit score.
Credit score depends on how many credit lines you have and how well you are managing it. In the case of an annual income of Rs.10 lakh, if you have never used a credit card and not taken any loan so far, you might not have a score at all. In contrast, you may have an annual income of Rs.5 lakh and a well-maintained credit card. This will lead to a high credit score, as much as 814.
4. Getting Married will Merge Your Scores
There is nothing like merging of credit scores in reality. No matter what your marital status is, credit scores are determined based on individual financial behaviour. Having joint bank accounts will not change anything with respect to your credit history and score.
5. You Can Get Access to the Credit Report Your Lender Can See
A consumer getting access to the same version of the credit report as a lender is a myth. A credit rating agency provides a detailed version of your credit report to a lender. Whereas, you will receive the credit report in a much more concise manner where only the details you need to know will be provided, whether it is a free copy or a paid copy.
6. Debit Card Builds a Credit Score
Debit cards do not contribute to building your credit history or getting a credit score. Since a debit card is a tool to access your savings account balance and does not cover the concept of ‘credit’, any transactions done with a debit card will not be considered to build your credit history or credit score.
You must avail a credit card or a loan to open your quota of credit history. Once your credit history is built, your credit score will be generated. However, it will take a few months to move from NA to a score.
7. Applying for a New Credit will Hurt Your Credit Score
You must know that applying for a new credit facility will not affect your score as long as you don’t apply at every available lender within a short period of time. If you apply at every lender institution, each of them sends an enquiry on your credit report. Numerous enquiries show that you are desperate for financial help, reducing your score.
Instead, you can apply for a credit facility at a trusted lender’s office. This activity will not hurt your score.
8. Disputing Credit Report Information will Increase Your Credit Score
You can dispute any errors you find in the credit report and ask the company for a correction. However, every dispute you raise may not impact your credit score. Dispute can be raised for an error in your name, date of birth, and contact details. A dispute can also be raised for an error in your bank account details and inclusion of a transaction that you have not done at all.
For issues related to a bank account and transactions, the credit rating agency will reach out the respective lender to get accurate information. If the lender denies the change you have requested, the credit agency will inform you the same and will wrap up your application without making any changes to your report. This, in turn, will not make any changes to your score. All disputes need not build your score.
9. Closing a Credit Card will Build Your Score
Closing a loan may help build your score; the same does not apply to a credit card. You may think of closing a credit card account that you seldom use. However, credit rating agencies consider this a negative move. According to the agencies, you must be capable of handling multiple credit lines well to get a good score. Even if you do not use an old card, it is advised to keep it active and make a nominal transaction with the card. Closing the old card account will not have any positive impact on your score.
10. Paying Off Debts will Erase the Transaction from Credit Report
Do not be under the illusion that paying off a debt will erase that entry from your credit history. The evidence of the debt will stay put with your credit history for years and impact your credit score and credit availability.
Such entries in your credit history will show that you have handled your debts responsibly and have been successful in paying it off. It will reassure any prospective lenders and put in a good word about you. On the other hand, any missed payments and defaulting registered can tell the lenders about your finance handling capabilities and stop them from approving your credit application.
Negative information can stay on your report for up to seven years; bankruptcy information can stay for as long as 10 years.
11. A Credit Report Agency Can Fix Your Score
You may come across ‘credit repair agencies’ when you are looking for measures to fix your low credit score. Based on the name, some people may mistake such agencies for firms that can repair a low score and build it up to a good score overnight by spending some money. However, it does not work that way.
A credit repair agency helps you file disputes with a credit rating agency if you can find errors on your credit report. The error can range from a mistake in your name to a mistake in a transaction registered under your name in the report. If you do not have the time or knowledge as to how you can dispute the errors, a credit repair agency can help you by doing the needful on your behalf.