7 CIBIL Score myths: Don't Fall For Them

by Bhavna S. Financial Advisor

Your credit score, also called CIBIL score, is a very important eligibility criterion which lenders assess when you apply for a loan. In fact, based on your CIBIL score, lenders take a decision whether your loan application would be accepted or rejected. That is why it becomes important for you to understand what constitutes your credit score and how it is affected, both positively and negatively. Since credit score is a technical concept with technical calculations, many myths are often associated with it. Here are some common credit score myths which you should not believe in –

A bad credit score is for life

Though a bad credit score is bad for you, it does not mean that you cannot improve it. A bad credit score remains for as long as you allow it to. You can improve CIBIL score from bad to good by paying your loans and credit card bills on time. It doesn’t even take a lot of time to do that.

Checking your credit score is bad for the score

While it is true that frequent credit score checks have an adverse effect on the score, the operating word is ‘frequent’. If you check your credit score yourself at least once a year, it would not have any effect on the score. In fact, checking it once a while actually improves the score as you can try and repay your loans on time for a positive effect. Only if you make multiple loan applications at once and multiple lenders check your credit score, it would be bad.

Clearing a disputed loan would immediately improve CIBIL score

Defaulting on your loans and credit card bills has a negative impact on your credit score and reduces it. Even if you clear off the outstanding liability, it takes seven years for the negative impact to be cleaned from your credit report. Moreover, if a loan is settled with the bank after negotiations, it would reflect poorly on your score.

Closing your credit card improves CIBIL score

Your credit score is measured by your credit utilisation ratio. The lower the ratio, the better the score you can have. When you have multiple credit cards you have multiple credit limits. As such, your credit utilisation ratio is low. When you close the credit cards, your credit utilisation increases which have a negative impact on your credit score. Let’s understand with an example. Suppose you have four credit cards each with a credit limit of INR 10, 000. Against a total limit of INR 40, 000, say you use INR 12, 000. Your credit utilisation ratio is 30%. When you close one card, your credit limit falls to INR 30, 000. Considering your usage to be the same, your utilisation becomes 40%. Since the utilisation ratio increases, your credit score reduces. Thus, closing your credit card does not necessarily improve your score.

Having no credit cards or loans mean a good credit score

Your credit score is calculated only when you have a credit to your name, whether through credit cards or through loans. If you don’t have any credit to your name, you wouldn’t even have a credit score. Therefore, having no credit cards or loans equals having no credit score. As such, you cannot have a good score.

Being a co-borrower or guarantor will not affect the credit score

If you act as a co-borrower for a loan or give your personal guarantee for another borrower, any default on the loans taken under these cases would affect your credit score negatively. As a co-borrower or third-party guarantor, you are also responsible for the repayment of the loan. As such, if there are any defaults, such defaults would bring down your credit score.

Having a high income or savings has a good impact on the credit score

No, this is a myth. Your income or savings have no impact on the credit score. It is your payment pattern on your debts which has an impact on your credit score. If you pay off your loans and credit card bills on time, your credit score would be positively affected irrespective of your income and investments.

Don’t fall for these popular myths surrounding credit scores. Understand how your score is computed and the factors affecting it. Maintaining a good score improves your borrowing prospects. So, bust these myths and build a good score.