ATM :: Four myths about your credit score

ARVIND JAYARAM | 26 Jan, 2014 | Hindu Business Line
Did you think you would get a better score not taking any loans? You’re wrong. We demystify how scores work


If you apply for a loan today, the bank will first check out your credit score. Though scores are now widely used, there are many misconceptions about how rating agencies — Cibil, Equifax and Experian — arrive at that magic number. Here’s where you may be wrong about how scores are computed.

Borrowing is bad
You may think that if you’ve never borrowed, your credit score will be higher than someone with lots of debt. But in reality, if you’ve not taken any loans before, lenders have no way of predicting how reliable you’ll be in repaying them in future. Creditors and lenders often consider people with no debt and no credit cards a higher risk than those who have proven that they are able to manage their debt responsibly. This may even lead them to reject your application, as most of them would like to see a credit report showing a few well-managed loans or cards and regular repayments.

In this regard, even making payments using a debit card or pre-paid credit card is essentially an electronic cheque and not an extension of credit and hence, doesn’t show up on your credit report. If you’re looking to build credit, using a secured or unsecured credit card responsibly is the best way to go.

Keep applying
Many people believe that you should apply to many lenders to bag that loan. But doing that may have many lenders checking out your credit history. That may affect your score.

When you pull your credit report for your own educational purposes, this is considered a “soft” inquiry and will not affect your credit score.

On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, this is a “hard” inquiry that may negatively impact your credit score.

For this reason, it’s important not to apply for loans simultaneously to multiple lenders. For example, if you submit applications for multiple credit cards at the same time, this could set alarm bells ringing with lenders, who may suspect your motives for soliciting so many cards at the same time.

Use it to the hilt
Lenders want to be sure you can afford more credit, so they prefer it if you don’t already owe large amounts on multiple accounts. So, don’t try to max out your card just because you have a high credit limit. Lenders also favour customers who aren’t heavily reliant on the credit; so keep your regular borrowing on cards to less than 25 per cent of your card limits.

If you want a better score, partly settling your credit card bill will not help. You’re more likely to get a lower score if you miss payments, make just minimum repayments or borrow right up to your credit limits. Also, keep in mind that the more credit accounts you have, the lower your credit score.

Once a blot, always one

If you’ve slipped up once it doesn’t black-mark you for a lifetime. There’s no such thing as a credit blacklist. Your credit report is supposed to give lenders an overview of your recent and current financial position.

As such, a 40-year-old who skipped instalments 20 years ago needn’t worry too much because it has no relevance to their likely behaviour today.

Most information about credit history lasts for up to seven years. Take note: some bankruptcies can stay on your report for up to 10 years from the date the bankruptcy was filed.

Importantly, when you pay off a loan that was due previously, your credit report will be updated to reflect that you’re current on the account. And as time goes by, the negative information will have less of an effect on your score.

Nevertheless, as the purpose of a credit report is to keep track of your credit history and your reliability in meeting payments, that information will remain on your report for seven years in most cases.

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