6 Credit Score Myths that you shouldn't fall for

If you want to choose a moratorium on term loans, know that it will not impact your credit score. Factors influence your credit scores such as total outstanding, repayment history, credit utilization, type of (Unsecured/Secured) loan and card payment on-time.

To offer more delay to borrowers, the Reserve Bank of India (RBI) on 22 May extended the moratorium on repayment of term loans by 3 months till 31 August 2020. The central bank indicated that the moratorium will have no unfavorable impact on the credit score of borrowers choosing for the moratorium of loan repayment. 

What is a Credit Score?

A credit score is a 3-digit number that shows the creditworthiness of a customer. Credit score varies between 300 and 900. Generally, Credit Score above 720 is recognized very good and anything under 300 is considered very poor. It is very important for consumers to make their credit record to enable the banking system to judge their creditworthiness. Many people end up with a bad credit history due to unawareness or lack of discipline.

Bank/NBFCs use the score of an individual to recognize the credibility of the customer being capable of repaying the loan before they approve or reject the loan application. It also impacts the borrowing capability, how much a person can borrow, and how flexible the loan tenure is. This is reliable for all forms of loan, be it Unsecured loan or Secured loan. A lot of factors are considered while calculating a person’s credit score.

It’s necessary to understand some of the myths that come with credit scores in order to make knowledgeable decisions.

Income impacts on my Credit Score

False, income does not directly impact your credit score, but it does play a key role in your loan capabilities, credit card eligibility and also increase the credit limit. Your salary and income are measurements that are considered for a customer’s capability to repay loans. 

A customer with high income but not repay the loan/EMI on time may have a lower credit score compared with a customer with comparatively lower income but Pay your loan/EMI on time.  Credit scores consider how much credit you use versus your total credit limit and how well you maintain that credit. Despite suffering a loss of income in full or part, if you are capable of paying your dues and EMIs on time, your credit score will not be affected.

No Loan Means Good Credit Score

False, If you don't have any loan or credit card. It means you don't have a credit history. Credit report outlines how you maintain your credit and the absence of it means there is no way a bank can know your financial performance. Hence, taking a credit could become challenging in the absence of a loan. 

You could face difficulties availing loans if you don't have a credit history. The best manner is to build a credit history by ensuring on-time payment.

Multiple Loans Means Lower Credit Score

False, Multiple loans could indicate you are credit greedy and multiple credit inquiries can have an adverse impact on your credit score. But, a credit score is affected by the capability to repay loans and not the number of loans. If you have multiple loans in your name but you repay EMI on time, you could have a higher credit score compared with someone with fewer loans but not paying on time. 

If your credit utilization is low and if you are able to make all repayments on time, then your credit score doesn't affect or decrease. But keep in mind that multiple running loans could increase responsibility, which could affect on-time payment.

Multiple Credit Cards mean Better Credit Score

False, Multiple credit cards mean having a higher availability of credit and consequently less usage. 

For Example, if you have 3 credit cards with a credit limit of Rs. 1 lakh each, then your total credit limit would be Rs. 3 lakhs. If your average credit card usage is Rs. 1 lakh, then your usage is 33%. But, Managing the multiple credit cards could be difficult because multiple credit cards could mean multiple card bills and various payment dates, increasing the chance of default.

Repaid Debt won't Reflect on Credit Report

False Credit reports track your account performance for two-three years and therefore, all loans you have or paying off the loan will show up on your credit report, and also impact on your credit score. If there were delays in your EMI, or credit card delay payment as well it would reflect on your score. 

EMI Moratorium will Impact Credit Score

False, If you opt for the moratorium on term loans to deal with any liquidity crisis that you could be encountering due to COVID-19, It will not affect your credit score as long as the data is announced by your bank. However, loans will continue to attract interest even during this period and your total liability will go up, which could affect your eligibility to avail new loans. While it may not hamper your credit score, the reality is you may not be able to avail new loans. It is advisable to keep track of your credit report from time to time.