a credit score is a 3 digit numerical representation given by credit rating agencies or bureaus that shows your creditworthiness. credit bureaus collect information from banks and financial institutions and prepare credit reports and credit scores for individuals and businesses. the credit report contains details about your - name, address, identity proof, date of birth, bank accounts history, payment history, debit cards/credit cards/loans history, etc.
you can maintain a good credit score by making timely payments of your credit cards, loans, debts, and low credit utilization ratio. late payments or defaults on loans may affect your scores negatively and you may have to put in a lot of effort and time for credit repair. hence, it's very important to remove misconceptions about what affects your credit score:
1. checking credit score lowers it
it's the most common myth. in fact, regularly monitoring your credit score helps you track the progress and take actions to increase the score when needed. checking your credit score is considered a soft inquiry and does not hurt your credit score. your credit score will decrease only if you apply for a loan or a credit card and the company does an inquiry which is considered a hard inquiry. if you check your credit score at CRED, it will not hurt your credit score.
2. carrying a balance on a credit card boosts credit score
false. carrying a balance on a credit card will not only lower your credit score but you may also end up losing a lot of money by paying higher interest. instead, you should pay off your credit card bill in full each month to maintain a low credit card utilization rate. a higher credit utilization rate will lower your credit score.
3. my income impacts my credit score
false. your income does not impact your credit score. the variables that impact a credit score includes - payment history, credit utilization rate, debts, length of credit history, frequency of new credit, credit mix, etc.
4. a good credit score means you are rich
false. as mentioned above, the credit score has nothing to do with your income. a credit score is used only to measure your credit risk. your income may be low but if you have consistently paid your bills on time and have a good credit mix, you are considered a good credit risk. a credit score would mean that you have high chance of defaulting on your credits.
5. paying off debt increases your credit score
it depends. if you are paying off your credit card debt, it may increase your credit score. however, if you pay off your installment debt, such as a mortgage or a loan, you won’t see a bump in your credit score. it can actually dent your score because you would have fewer credit accounts. but it does not mean that you should not pay off your debt if you have surplus funds. it may help you skip paying unnecessary interest over time.
6. my employer can see my credit score
false. employers can view the credit report from a perspective, but the type of credit report that employers have access to does not include your actual credit score. the credit report that employers see includes your debt and payment history so they can look for any signs of financial distress.
7. student loans don’t affect credit score
false. all types of loans have an impact on your credit score including - car loan, home loan, personal loan, student loan, mortgage, medical bills, etc. so whether it's your credit card bills or student loan EMIs, pay all your debts on time to maintain a good credit score.
8. using debit cards helps build a good credit score
false. debit cards do not offer any credit, hence they are never displayed on your credit reports. so, debit cards do not impact your credit score.
9. closing a credit card improves the credit score
false. closing a credit card is never recommended as it may lower your credit score. but if your credit card has an annual fee and you are losing money by keeping it, then you may close your credit card. it’s better to switch to a no annual fee credit card.
10. getting married will merge my credit score with my spouse
false. your marital status does not impact your credit report. even when you apply for a joint loan, the credit score of each partner is taken into consideration by the lenders.