Credit scores are used for everything from determining your loan interest rate to setting borrowing limits, and are part of every financial decision you consider. Lenders weave their entire playbook around your credit score; it’s also a crucial measure of your creditworthiness.
Credit scores are often misinterpreted as they lack uniformity. Since there’s more than just one credit score, people often find themselves confused in dealing with them.
Credit Rating Agencies (CRAs) are responsible for calculating your credit scores. They vary because they don’t use a standard parameter or baseline for their credit score calculation. Some CRAs may prioritise loan repayments while others may look for minimal credit usage.
This has led to the rise of a few misconceptions regarding how credit scores work. We’ll attempt to debunk a few of these in this article.
1. Myth- No Loan for Those with Bad Credit Score
There is a loan option for everyone and those with bad credit aren’t an exception. The reason is, that over the last few years of financial slowdown and the cost-of-living crisis, people have resorted to credit options to deal with rising prices.
As a result, there have been efforts to make credit options more accessible as well as affordable in an attempt to reduce people’s financial burdens.
If you’re struggling with bad credit, you could still get a loan. However, it may be difficult to get high amounts at low interest.
But, you still have options. You can always consider taking personal loans from non-profit lenders or credit unions that have low-interest rate options.
If you’re employed, you could consider a bad credit payday loan. This is useful for short-term expenses & can be taken if you can repay your loan by the next payday.
If you’re unemployed & need a small amount for a loan, a credit builder loan could be helpful. You get a chance to improve your credit score this way. Guarantor loans & secured loans are also equally good options to consider.
2. Myth- No Debt Means Good Credit Score
Credit scores are impacted negatively by debt. While there’s no doubt about that, it’d be unwise to assume the opposite could be true. Having no credit history or no debt can sometimes work against you. While this is especially true when you consider borrowing for the first time, it is better than having bad credit.
Lenders are generally anxious & nervous around first-time borrowers because of a lack of borrowing history to refer to. Credit scores give them a good idea of your repayment capacity & boost reliability.
3. Myth- Only One Credit Score
This is easy to debunk. You have 3 Credit Rating Agencies (CRAs) that all give you a different credit score. As mentioned earlier, they use different factors & formulas.
This results in different scores, but an easy thumb rule to use while interpreting your credit score is this. Though the credit score number may vary, it’ll be within a particular range across all CRAs.
This means if you’re in the ‘good credit score’ range in one particular CRA, you’ll most likely be in the same range in another CRA’s calculation.
Any wide discrepancies in your credit score across all 3 CRAs would merit a closer investigation of inaccuracies or errors on your credit report.
4. Myth- High Income Means High Credit Score
CRAs have a wide variety of factors to consider before arriving at your credit score. However, your income is NOT one of those factors.
Irrespective of whether you earn an average income or a high income, your credit score is not impacted by it. Credit scores factor in things like borrower reliability, timely loan repayments, and healthy credit utilisation, but never your income.
However, your income can still be part of a background hard-credit check for a personal loan application. But your credit score is another story.
It is entirely possible to be earning well and have a poor credit score. Using multiple credits in a short period or payment defaults could impact your credit score negatively. On the other hand, it’s also possible to be an average earner and have a good credit score because of being punctual in making repayments.
5. Myth-Your Credit Score Will Remain Constant
The chances of your credit score remaining constant are pretty slim. They can fluctuate or remain steady, perhaps for long periods but they’re unlikely to remain the same.
Starting a savings account, living frugally, cutting out unnecessary costs, and budgeting effectively can show steady improvements in your credit score.
Similarly, misusing your credit options or taking too many in a short time just because you can will lead to a lower credit score. This, coupled with skipped payments and a lack of financial preparedness, can be a recipe for disaster.
That said, you are completely in control of whether your credit score will improve or not. Yet, it’s safe to say it won’t remain constant.
Conclusion
Credit scores are handy financial tools to manage and improve your financial health. However, to make the most of your score, it’s crucial to stay on top of your repayment schedule and limit your credit usage.
Fortunately, with these 5 myth busters, you now know the reality of credit scores and can make informed decisions to improve yours. We hope this article has helped you find what you’re looking for. Thanks for reading.