Know these credit score myths before starting your credit journey
Credit score is one of the most important factors that lenders evaluate and research before approving or declining a loan.
When you apply for credit, whether it's a personal loan or a credit card, lenders often check your credit score to determine your eligibility. While a good credit score increases the chances of loan approval, a bad credit score can often run down the chances. This means that credit scores are among the key factors that are evaluated by banks or NBFCs when assessing a loan application. What exactly do we mean when we talk about a good credit score and how is it different from a bad one? Let's find out.
What is a credit score?
Also referred to as the 'CIBIL score', a credit score is a three-digit score ranging between 300 and 900. These numbers include almost everything about your credit history, mainly your payment history. As credit scores reflect a person's ability to repay loans, lenders consider it as the assessment of his creditworthiness. The higher the credit score, the more appealing it seems to banks and NBFCs. The concept of credit scores is often misunderstood and there are also a lot of misconceptions about them.
Having proper knowledge about them is very important, especially when you are yet to start your credit journey. Not knowing about them can land you in a serious financial problem.
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Myths around credit score
Single credit score for all: Many people believe that everyone has a single and universal credit score, however, this is not true. A person can have multiple credit scores, as computed by the credit bureaus. There are four credit bureaus – TransUnion CIBIL, Equifax, Experian, and CRIF High Mark – that evaluate and assign ratings to individuals and business entities.
Credit scores and credit reports are the same: People also believe that credit scores are the same as credit reports, thanks to similar names. However, a credit score is simply a single numerical grade ranging from 300-900 that depicts a person's credit history, whereas a credit report is a detailed compilation of all your credit-related information including personal details, credit accounts, credit inquiries and public records.
Checking credit score leaves a negative impact: There is another common credit score myth that periodically checking one's credit score can lower the grade. This is not true. Instead, reviewing your credit score at regular intervals can help you to monitor it and make necessary improvements if required.
Paying debts will improve credit score: People believe in about credit scores that paying off debts can boost their credit score. This is not entirely true as it is mostly applicable to credit cards. Paying off a loan like an education or personal home loan in full will mean that a person has fewer credit accounts and thus there are lower points to upgrade the credit score.