When it comes to managing personal finances, understanding your credit score is important. However, numerous misconceptions cloud the real impact of your credit score on your financial well-being. This blog aims to clear up common credit score myths and set the record straight, enhancing your financial literacy and empowering you to make better decisions.
Understanding your credit score: What it really means
Your credit score is a numerical expression based on an analysis of your credit files, representing your creditworthiness.
Lenders use credit scores to evaluate the probability that you can repay your debts on time. A high score is seen as favourable, potentially leading to better interest rates and more favourable lending terms.
Common myths
Credit scores are essential for financial health, but there are various misconceptions surrounding them. Here are some common myths debunked -
Myth 1: Checking your credit score regularly lowers it
One of the most common credit myths is that every time you check your credit score, it takes a hit. In reality, a check made by you (a soft inquiry) does not affect your credit score. Only hard inquiries by lenders, when you apply for credit, can impact your score. Regular checks are essential and healthy as they allow you to stay informed and manage your credit efficiently.
Myth 2: Your credit score only matters when getting a loan
While it's true that your credit score is crucial when applying for loans, this is not its only use. Landlords, employers and insurance companies might use your score to determine your financial responsibility. Maintaining a good credit score can thus influence various aspects of your life, from renting a home to securing a job in certain industries.
Myth 3: Closing old credit accounts boosts your credit score
Contrary to this credit score misconception, closing old credit accounts can actually lower your credit score. This is because it decreases the amount of available credit and typically increases your credit utilisation ratio — a key factor in determining your score. It’s often better to keep old accounts open, provided they do not cost you money in annual fees.
Myth 4: All debts negatively impact your credit score
Not all debt is bad. Credit mix — including Retail Accounts, Mortgages, Credit Cards, and instalment loans — can have a positive impact on your credit score. However, it is important to maintain timely repayments, have lower credit ultilisation and low debt to income ratio to maintain a good score. Demonstrating that you can manage different types of credit responsibly counts towards your creditworthiness. Misconceptions about credit often discourage people from taking on any form of debt, which isn't a balanced financial strategy.
Myth 5: A poor credit score stays with you forever
This is perhaps one of the most discouraging credit score misconceptions. It's important to know that your credit score is fluid and can change based on your credit activity and financial behaviour. With consistent efforts, such as paying bills on time, your score can improve significantly over time.
Also Read: Top 4 ways to get Personal Loan online with low CIBIL Score
Your path to better credit management
To further demystify your credit score and take control of your financial destiny, consider exploring reliable financial tools and services. Axis Bank offers features like tracking account activity and providing insights for a healthier credit score. Additionally, the bank provides the facility to download your credit report for free, empowering you with essential information to manage your finances effectively.
Understanding the truth behind common credit myths not only aids in financial management but also helps in planning your future with confidence. Always strive to educate yourself about financial matters and seek professional advice when needed.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
