Credit Score: 7 myths that most people believe | Mint

A credit score is an important metric of your financial liquidity. This is a three-digit number that gives an indication of your creditworthiness.

Lower the credit score, poorer the creditworthiness and conversely, higher this number – higher the creditworthiness. Before banks offer loans to someone, they tend to judge a person’s creditworthiness via his/her credit score.

When a financial institution finds that the applicant’s credit score is high — it is more likely to extend the loan since he is seen to be financially sound. And when someone has a bad credit score, it implicitly means that the person is financially not sound, thus restraining the bank from offering a loan to that person.

However, there are several myths attached to credit scores. Here we list out these myths

Credit score: 7 myths you should be aware of

I. Checking your score often leads to loss of score: There is a perception that your credit score declines if you check it often. This calls for knowledge about the difference between soft and hard inquiry. A soft inquiry is the one which happens when you check your score whereas the hard inquiry happens when you apply for a loan.

There is no loss of credit score when you check your credit score whereas there could be a little decline, albeit temporarily, in your score when you apply for a loan.

II. Taking a loan leads to a poorer score: There is another wrong perception that securing a loan is bad for credit score. Taking a loan or credit card

III. Credit card is bad for your credit score: As mentioned above, keeping a credit card helps build the credit profile. So, it is not bad for the credit score, as some tend to believe.

IV. Too many credit cards are bad for credit score: When you have a large number of credit cards, you tend to have a high credit limit, which is good for your credit score and not bad.

VI. Closing old credit cards improves your credit score: This is again not true. As a matter of fact, closing old accounts can lower your credit score.

VII. High income leads to high credit score: Your income has no direct impact on your credit score. Credit bureaus such as CRIF High Mark calculate your score based on your credit behaviour, and not on your salary. Therefore, clearing bills on time, using credit responsibly, and managing loans effectively matter more and not how much you earn.

(Note: Raising a loan comes with its own risks. So, due caution is advised)