Top 5 credit score myths in India that even bankers believe

Clearly understanding the concept of credit scores is important for financial well-being and economic prosperity. Lending institutions use these scores to analyse and assess personal loan and credit card eligibility.

Still, it has been seen that there are several misconceptions around the topic that make things difficult for not only bankers and professionals but even normal borrowers while they are going through the process of making borrowing decisions. Let us hence understand the basic concept of credit scores, associated myths, and secure better financial health.

What is a credit score?

A credit score is simply a three-digit number that reflects an individual’s creditworthiness, repayment integrity. This score is decided based on several factors, such as repayment history, personal loan types, along credit usage.

Also Read | 4 smart ways to start building your credit score as a beginner

Lending institutions use this number to make lending decisions. The concept here is simple: the higher your credit score, the better it is for securing a favourable personal loan or a premium credit card. Below is a table explaining the basic range of credit scores and their implications on credit quality:

Note: The scores above are illustrative, and actual ranges may differ across credit bureaus.

5 common credit score myths in India

1. Checking your credit score lowers it

Many professionals believe regular self-checks hurt their credit score, but these are ‘soft inquiries’ and have no effect. Hence, if you ever check your score, it has no negative influence on your credit score. Consistent checks and management can ensure that your credit score remains healthy because, during checks, if there are any errors found, these errors can be promptly reported, and the credit profile can be improved upon seamlessly.

2. Higher income means a higher credit score

It is important to clearly acknowledge the fact that the earnings of an individual are not a factor in calculating credit scores. It is only the credit-related behaviour that matters. This means, the borrower’s repayment efficiency, loan management, not applying for several loans or credit cards in a very short time are some factors that matter, and income has no relationship with these factors.

3. Closing a credit card erases past debt history

Settled or closed accounts remain in your report for years and will be visible to lenders. That is why closing a credit card will never erase your past debt history. For example, if you miss your credit card bills or home loan EMIs due to financial constraints, then this will not just be removed from your credit profile once you make the payment later; in fact, it will stick around for a few years and will continue to reflect.

4. Never borrowing means a perfect score

The myth that never borrowing funds will ensure that the individual will always have a clean credit profile, a profile that will help in easy borrowing later on. This myth needs to be busted. To put it simply, no credit activity leads to no score at all, making it harder to access loans.

Therefore, it is crucial to note that credit history plays an extremely vital role in the entire loan approval process. Hence, if you have no history of borrowing, then securing a loan seamlessly might not be easy.

5. All credit scores and credit information companies are the same

This is another myth; several aspirational borrowers and even professionals are not aware of the credit landscape of the country. Do keep in mind, multiple licensed bureaus exist in the nation. The major credit bureaus officially recognised in the nation are CIBIL, Experian, CRIF High Mark, and Equifax. Each of these bureaus uses its unique algorithms to analyse and assess one’s credit profile.

Also Read | 5 easy ways to boost your credit score without using a credit card

Factors such as repayment history, credit utilisation ratio, and past defaults all cumulatively formulate an individual’s credit profile. That is why it is normal for individuals to have slightly different credit scores across bureaus at the same time, underlining why monitoring reports from all major agencies is vital.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.

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