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Mythology of a great CIBIL score

13-Sep-2016 written by : FSI-Team

So what is behind a great credit score, anyway? What is it that you must do if you want to be in that much-admired league of individuals with a score of 800 and above? For starters then, let us try to understand why so many myths abound with regards to credit scores in the first place, which will help us segregate fact from fiction so that we can work towards ensuring a good credit score.

Myths about credit scores float around primarily for two reasons – (a) lack of awareness about credit scores and (b) having a limited or close to nil understanding of the subject, even if one is aware of the same.

What is a credit score?

A credit score is a three-digit summation of your credit information report or CIR, which sums up your credit behaviour, both past history and the present, in one succinct whole. It indicates to a lender how creditworthy a person is, or what are the chances of a loan going bad, if an individual were to default on loan repayment. This information is based on actual information submitted by banks and financial institutions to a credit bureau, which then puts together this data.

Among the myths that you hear, the below are common ones that do the rounds most often, and you need to dispel these myths if you are to build a good score for yourself.

No credit equals to a good score – This is not always the case, because in all probability, no credit will be equal to no score. Yes, that's correct. This is because a score is generated on account of your credit behaviour, and not outside of it. In fact, if your credit report carries a '-1' where the score should be, know that it is because you have as on date either not taken a loan or credit card, or even if you have, the data is insufficient to reflect on a report. This is typically the case with new jobbers, who may not have felt the need to establish a credit record as yet. However, it is advisable to avail of a credit card (even with a lower limit) or a loan to start building your credit history. Remember that no credit makes it difficult for a lender to approve a loan when you really need it (say a home loan a little later in your career), so it is best to start off early, but exercise prudence when signing up for credit.

You can never improve your credit score – This one is again anything but true, because while it may be difficult to improve a credit score, it is definitely not impossible. What you need is some financial discipline and patience, to be able to slowly but steadily bring your score back up to scratch. The first step would be to call for your credit report, know how much work is needed to repair your score, and take it from there. Start off by assessing the amounts you owe, and make a plan as to how you will repay existing debt. This is your stepping stone to improving your score over a period of time.

Closing accounts increases credit score – On the contrary, this may just hurt your score more than you imagined. Let us say for instance you have a credit card that you have been servicing well for a decade or so, by which we mean timely payments and no skipped or missed payments to mar the record. In such an instance, in fact, keeping this account live is more likely to help boost your score – just the opposite of what the myth suggests. Of course, this is only applicable with good accounts, so if you do have a long-running account, continue to maintain it similarly and give your score a boost. Also remember that merely closing a bad account does not erase all traces of it from your credit report, hence your score will definitely not improve as a result of a 'settled' or closed account.

A good score guarantees a new loan or credit card – Well, not always! The probability of your loan or credit card approval being looked at favourably at the credit underwriting stage does improve, but that does not guarantee an immediate approval. This is because when a lender reviews an application, it is not in isolation of a credit score. Other factors taken into account include your income, existing debt and other obligations, but what the score does is help the lender gauge both your ability as well as intention to repay a loan.

All financial transactions affect the credit score –This is not true, because financial transactions include for instance your banking as well. As on date, the way credit scores are structured, information pertaining only to credit cards and loans (both structured and unstructured) are taken into account to calculate a credit score. Hence your banking or investment in fixed deposits, stocks or mutual funds will not affect the score.

In conclusion

Understand your score thoroughly well in order to ensure that when you most need credit, a good score can come to your rescue to better your chances of loan or credit card approval.


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