Ignore these 6 credit score myths

When Ms Prerna applied for a credit card in the first year of her job as a junior fashion designer, her application was rejected based on a low credit score, owing to her lack of credit history.

Her friends told her that her low annual salary was to blame, but her credit score would remain low for the foreseeable future since she did not have a credit history to fall back on thereby preventing her from enhancing her credit score. Ms Prerna began to dig deeper and she came across the following myths.

Is your income to blame? 

 Your credit score is determined by the details in your credit report, and your income is not included in this report. Consequently, even with a salary of Rs.15 lakh, you could have a low credit score if your credit behaviour is poor. Conversely, someone with a lower income can have a high credit score if they maintain a good credit history, such as paying bills on time and sticking to balanced credit utilisation. This highlights that income level does not directly impact your credit score; responsible credit management does.

Will a balance on card card ramp up credit score? 

 If you keep a balance on your credit card--which is the amount you still need to repay-- for a long period, your credit score may become poorer, even as you continue to pay interest and therefore lose money. This balance tends to impact your credit card utilisation rate, which can, in turn, push down your credit score so make sure to clear your monthly dues promptly.

You do not need to worry about student loan?  

Your credit score is influenced by more than just your credit card payments – timely payments of all bills, including utilities, student loans, mortgages, and medical bills, are crucial. To avoid missing payments, consider setting up autopay mandates and check if your student loan company offers a discount on your interest rate if you enrol for the same, as it will make it easier for you to stay on top of your finances.

Is it possible to improve credit score?

 A credit score reflects your financial history, but a low score is not permanent. You can improve your score over time by developing good credit habits – following sound practices can help you build a good score, allowing past negative transactions to fade. Typically, transactions remain on your report for about three years, while details like bankruptcy and payment defaults can stay up to 10 years. However, it is possible to improve your score by consistently managing your credit responsibly and demonstrating positive financial behaviour.

Will closing old accounts improve your credit score?

Closing an old credit card or bank account can shorten your credit and financial history, which might in turn negatively impact your credit score. A long credit history provides lenders with a clearer picture of your credit behaviour . So remember that while closing an account can save on annual fees and reduce fraud risk; it could also lower your score. Indeed, accounts that have been open for a long time and those with high credit limits but low balances can positively influence your credit score.

Will applying for a new credit card harm your credit score?

If you are thinking of applying for a new credit card, for better benefits, do not fear its impact on your present credit score, unless you make it a practice of applying to multiple service providers within a brief time. Every time you make an application, an inquiry is made into your credit report. Multiple inquiries in a short period can indicate financial difficulties, leading to a lower score. So, apply to a single reputed service provider instead of randomly tapping multiple avenues.

Once she understood these myths,  Ms Prerna found it easy to navigate the credit card ecosystem. She began her journey by applying for a credit card with a lower limit of  Rs. 1 lakh and worked towards building her credit history by utilising only 30% of her limit. She was also timely with her repayments and within a year, her credit score was significantly better, making her future credit voyage easier.

                                                 (By arrangement with livemint.com)