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Nine myths about credit score and credit report

Take for instance, the distinguishing factor between credit score and report. Most believe these words can be used interchangeably.

July 08, 2014 9:00 IST | India Infoline News Service
Inadequate understanding of words can result in myths. And when it comes to financial world, where thorough understanding of words makes a material difference, one cannot afford slight understanding. Take for instance, the distinguishing factor between credit score and report. Most believe these words can be used interchangeably. In truth, one (credit score) is a part of the whole (credit report). Like this, there are various myths associated with these two terms. As more and more banks insist on having an inspection of your credit profile, it is important that we debunk various myths associated with credit ‘score’ and ‘report.’ Here is a low-down:-

1. Inspecting your credit report brings down your credit score
When you are requesting your credit report just for the purpose of knowing your credit score, it is treated as a soft inquiry and does not pull your credit score down. Instead, when a lender does so to assess your loan application, it is treated as a hard inquiry and multiple such hard inquiries in a short span can adversely impact your score.

2. Your income tells your CIBIL score
Your income has no role to play in computation of your credit score. Your CIBIL report does not capture your income. CIBIL score maybe low even for rich people with high income due to multiple reasons.

3. Dispensing with credit cards leads to high credit score
Do not cancel or close down your credit cards’ services. It may in fact hurt you as it brings down your available credit limit and in turn pushes up your credit utilization ratio. High credit utilization ratio means low credit score. Instead, use all your credit cards responsibly and keep its utilization low.

4. There is only one credit score
In India, CIBIL score is a synonym for credit score. But it is not the case. There are four credit bureaus in India – CIBIL, Experian, Equifax and High Mark.

5. Pay your bills on time and forget your credit report
 Many times people think that if they pay their credit card and utility bills on time, they need not check their credit report. But there are cases of inaccurate data being used by credit bureaus as well, which can lead to a lower credit score. Also people are exposed to identity theft, wherein shenanigans raise loans posing as someone else and do not pay back, effectively lowering credit score of the innocent individual in whose name such credit is availed. Do check your credit reports at least once a year.

6. Paying off a disputed outstanding will clean the credit report
Even if you pay off such outstanding, the DPD or repayment string will remain on your credit report for at least three years. Credit report is all about your repayment history and such defaults or late payments remain in the credit report till they age. If you pay off such an account, surely, the negative impact it causes to the credit score goes down.

7. Your bank balance impacts your CIBIL score
 Your credit score has nothing to do with your bank balance or your portfolio size or returns on your portfolio. It is solely dependent on how good you handle credit.

8. Cash saves you from this credit score mess
 Avoiding credit cards is not the way out to keep your credit score in good shape. Rather using credit cards responsibly can help you build your credit score gradually.

9. Debit cards and pre-paid cards help your credit score
 Credit scores do not factor in your debit card use. Replacing credit cards with debit cards and pre-paid cards may help you in controlling your expenses but it would not help your credit score.

The author is Co-Founder & Director, CreditVidya

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