Credit scores of a person tell the likelihood of someone defaulting on their payments. There are many misconceptions surrounding credit scores, as to what affects them and what doesn’t.
First let’s understand where you stand !
The credit score ranges anywhere from 1000 to 2000. Where a person with a score of 1000 (HH) has the highest chance of defaulting on its payments, dues, credits and loans. Whereas, on the other hand, a person with a score of 2000 or close to 2000 is least likely to default on its payments, dues, credits and loans.
Myth no. 1: Having some dues left on your credit card is good for your credit score
The credit score ranges anywhere from 1000 to 2000. Where a person with a score of 1000 (HH) has the highest chance of defaulting on its payments, dues, credits and loans. Whereas, on the other hand, a person with a score of 2000 or close to 2000 is least likely to default on its payments, dues, credits and loans.
Reality
The misconception about credit cards and credit scores is that good usage of your credit card is healthy for your credit score. Another misconception is that the interest you pay to your bank on the amount due on your credit card keeps them happy as you bring them extra revenue and they see you as a regular customer. This is, in turn, helps you increase your credit score.
Myth No. 2 : Checking your credit report will reduce your credit score
People are often worried about hurting their credit score. The myth surrounding credit reports is that requesting your credit report would hurt your credit score.
Reality
There are two kinds of enquiries when generating a credit report – a soft enquiry and a hard enquiry.
A soft enquiry is a self-requested credit report and does not affect one’s credit score. Hard enquiries are made by banks when you apply for a new loan from them, and affect your credit score. They do this to check your creditworthiness and this enquiry stays on your file for 2 years, but your credit score is affected for a period of 12 months only.
Myth No. 3: Paying someone can help increase your credit score
There are many advertisements of companies/services that can help you repair your credit score.
Reality
Credit repair services don’t really work. The only way to repair or maintain a healthy credit score is by paying back your credit card and loan EMIs on time. This also involves understanding how one’s credit score is calculated. A credit score has various components which determine one’s score and rating, they are as follow:
- Payment history – 35% of your credit score
- Credit utilization – 30%
- Length of credit history – 15%
- Amount of new credit (and inquiries) – 10%
- Credit mix – 10%
Therefore, 50 % of all components is dependent on time and hence, one needs to be patient in order to improve their credit score
Myth No. 4: Your credit rating abroad can affect your credit rating in your home country
There are many advertisements of companies/services that can help you repair your credit score.
Reality
One can have different credit ratings in the different nations where he resides or lives. Credit information is not freely transferred or shared between corporations present across borders. However, a bank can request and look into your credit report and score from the different nations you reside in or have lived in the past; or a bank in a foreign country can inquire for your credit report in your native country.
Myth no. 5: No credit history means a very high credit score
This myth says that if someone has never applied or taken any credit, then it means that they have a really high credit score.
Reality
Having no credit history actually makes it difficult to ascertain one’s creditworthiness and make it more difficult and risky for a bank to grant that person a loan. For those who have never taken a loan, start with a credit score of CX. Therefore, it is always difficult to get full financing for buying a house or other assets for a first-time borrower.
Bottom Line
This myth says that if someone has never applied or taken any credit, then it means that they have a really high credit score.
