Many people believe common credit score myths that can negatively impact their financial decisions. A credit score is a numerical value between 300 and 900 that indicates your creditworthiness, calculated using factors like payment history, credit usage, and length of credit history. Understanding the truth behind these myths helps you improve your credit score faster and increase your chances of loan approval.
Common Credit Score Myths You Should Stop Believing
“Myth” as the word symbolizes is what you believe in, but that does not exist. There are various beliefs about credit scores among individuals, but they do not reflect real situations. The following are some of the most common credit score myths that you should stop believing in.
Myth 1: Checking Your Credit Score Lowers It
Checking your own credit score does not lower it. It amounts to a ‘Soft Inquiry’. A soft inquiry on your credit score will not harm your credit score. On the contrary, when you apply for a loan or credit card, the lender does a check on your credit score with the credit bureaus. Lender checking your credit score amounts to a ‘Hard Inquiry’ and will reduce your credit score. Always apply for a loan or a credit card only when you require the most.
Myth 2: A High Income Guarantees a High Credit Score
A credit score is a depiction of your financial discipline. Your credit score is determined through your on-time repayments, credit utilization, and credit mix. Your income does not become a part of your credit report. So, it is a popular myth that a high-income person will have a high credit score. A person with a low income will have a high credit score, and a person with a high income will have a low credit score.
Myth 3: Closing Old Credit Cards Improves Your Score
Fact: Closing old credit cards can actually reduce your score.
Older credit accounts increase your credit age, which is an important factor in your credit profile. When you close an old card, you reduce your total available credit and shorten your credit history - both of which can negatively impact your score.
Smart move: Keep old credit cards active (even with minimal usage) to maintain a longer credit history.
Additional Reading: How To Build Your Credit Score From Scratch?
Myth 4: Having No Loans or Credit Cards Means a Good Credit Score
No. Having no loans or credit cards results in no credit score. Your credit score is calculated based on your past credit history. Lenders cannot assess your creditworthiness without your credit history. Credit bureaus will mark your profile as “No History”. Avoiding debt is good, but you need to maintain positive credit activity to build a strong credit profile for your future needs.
Myth 5: One Missed EMI Will Not Destroy Your Credit Score
Even a single missed EMI or credit card dues will reduce your credit score. Payment History is one of the significant contributors to calculating your credit score. Being consistent with your credit card payments and loan EMI payments is crucial in maintaining your credit score. You need to set up auto-debits and reminders to ensure you make on-time payments for your bills. Keeping proper track of your due dates will also increase your score over time.
Myth 6: Credit Score Improves Overnight
Credit Building is a continuous, ongoing process. The credit score increases and decreases based on the way you have handled your credit. But a visible result of your credit score can be seen within a few weeks to a few months by adopting certain credit discipline behaviors. Some key actions to improve a credit score include making on-time payments, reducing credit card debt, disputing errors, and avoiding new credit applications. These data are recorded by lenders and reported to credit bureaus, which, in turn, increase your credit score.
Myth 7: Multiple Loan Applications Increase Approval Chances
Multiple loan applications within a short period will decrease your chances of loan approval. Every inquiry on your credit report will trigger a hard Inquiry and thereby reduce your credit score. So go for a loan or a credit card only when you need it most. Or the best way is do a pre-qualification check before applying for a loan,
Myth 8: Credit Score Is the Same Across All Bureaus
All the credit bureaus use different methods for calculating credit scores. This is due to the algorithms used by these credit bureaus, the data reported by lenders, and differences in the timelines for data updates. Credit scores from different credit bureaus are essential for managing your overall credit health, and minor deviations are standard.
Myth 9: Settling a Loan Is the Same as Closing It
Closing a loan means you are repaying the outstanding balance due on your loan account in full and final. On the contrary, settling a loan means you do not have the financial capacity to repay the loan. Hence, you decide to repay a lesser amount agreed mutually by the lender, leaving with a “Settled” mark on your credit report. This significantly reduces your credit score and also hampers your future borrowing ability. Always opt to close your loan rather than settle it.
Myth 10: Taking a Personal Loan Will Reduce Credit Score
Taking a personal loan will not reduce your credit score. A personal loan application enquiry will result in a hard Inquiry on your credit report. But the effect will be minimal. After taking a personal loan, if you make on-time payments and maintain good credit behavior, your credit score will improve.
Conclusion
Misconceptions about credit scores might hold you back from taking the first step towards a bright financial future. Some of the positive steps that can be taken include checking your credit score with the official credit bureaus, avoiding too many hard inquiries on your credit report, not closing old credit cards, making on-time payments, and maintaining a good mix of credit. Taking charge of your credit score and building a good credit history will help you make wise financial decisions.
Frequently Asked Questions
1. Will checking my own credit score affect it?
No. When you check your own credit score, it is treated as a soft Inquiry, which does not impact your score. Unlike lender-initiated hard enquiries, soft checks are not visible to other creditors and are not used in score calculations. In fact, reviewing your score regularly is a good practice, as it helps you identify errors or suspicious activity early.
2. What is considered a good credit score?
A credit score of 750 or above is generally considered good and improves your chances of approval for loans and credit cards. Scores above 800 are seen as excellent. While scoring models may differ slightly across bureaus, consistently managing your credit responsibly will help you stay within this strong range.
3. Does carrying a credit card balance help improve credit?
No, this is a myth. Carrying a balance does not improve your credit score - in fact, it can increase your interest costs significantly. Credit cards often charge high interest rates, making unpaid balances expensive over time. The best way to build a strong credit score is to use your card regularly and pay the full amount on time every month.
4. Does closing an old credit card improve my credit score?
No, it can actually lower your score. Closing an old card may shorten your credit history and reduce your total available credit, which increases your credit utilisation ratio. Both factors can negatively impact your score. Unless the card has high fees, it is usually better to keep older accounts active with minimal usage.
5. Can I improve my credit score quickly?
Not instantly, Credit scores are built over time through consistent, positive behaviour - there are no shortcuts. Key habits that steadily improve your score include making repayments on time every month, keeping your credit utilisation low (ideally below 30%), maintaining a diverse credit mix, avoiding too many hard enquiries in a short period, and keeping older credit accounts open. Significant improvement typically takes several months of sustained effort.