Much is written and read about credit scores but some simple practical facts are often overlooked. You can control what your credit score looks like. We debunk some myths that surround credit score and this might just help you get a better rate when you apply for your loan.
Rahul Patkar was quite sure that a good credit score is important. On the advice of his Chartered Accountant,Rahul had applied for a credit report from CIBIL. To his dismay, his credit score was 650, which is on the lower side. He could not figure out why was his credit score low. He had not defaulted on a loan after all!
Like Rahul many of us believe that it is only a loan default that can affect your credit score. So let us debunk a few myths that surround credit scores
1) I have not applied for my credit score, hence it does not exist
Credit companies collect and compile data of every individual, who hold a loan account, has a credit card or has applied for a loan. So whether you have applied for your credit report or not, it exists and can be accessed by the lender.
2) I had defaulted on my credit card payments 8 years ago – it has brought down my credit score
Late payments and defaults do affect your credit score adversely. Recency of default has the maximum impact on your Credit score, the defaults over last 12- 24 months are taken into account for calculating your score. Incase of old defaults, they will have very little impact on your Credit
3) It does not matter how much credit I take, as long as I make my payments on time
There are two aspects to borrowing as far as credit scores are concerned – how much credit and type of credit. Too much borrowing can adversely affect your credit score even if you pay every EMI of every loan on time. Also, unsecured loans such as personal loans or too many credit cards also adversely affect your credit report. Further too many enquires for loans will reduce your credit scores.
It is true that credit scores started out as proving the bank information about the credit risk of the borrower, however credit score are used for much more now. The Credit Information Companies Regulation Act (CICRA) permits institutions like banks, insurance companies, telecom companies, broking firms and asset reconstruction companies to access credit information companies' database. Hence in a bad credit score could potentially mean higher insurance premiums, rejection from a landlord to rent a house or even losing the job you wanted.