5 MYTHS about your credit scores debunked

Loan defaults are not the only reason why you get a low credit score. Rajiv Raj of CreditVidya.com debunks five popular credit score-myths.

Rahul Patkar was quite sure that a good credit score is important. On the advice of his chartered accountant, Rahul had applied for a credit report from CIBIL. To his dismay, his CIBIL (Credit Information Bureau of India Limited) credit score was 650, which is on the lower side. He could not figure out why was his credit score was low. He had not defaulted on a loan after all!

Like Rahul many of us believe that it is only a loan default that can affect your CIBIL credit score. So let us debunk a few myths that surround credit scores:

1. I have not applied for my credit score, hence it does not exist

Credit companies collect and compile data of every individual, who hold a loan account, has a credit card or has applied for a loan. So whether you have applied for your credit report or not, it exists and can be accessed by the lender.

2. I had defaulted on my credit card payments 8 years ago, it has brought down my credit score

Late payments and defaults do affect your credit score adversely. However, only defaults over last 2 to 3 years are taken into account for calculating your score. In case of old defaults, they will not matter for the current score.

3. It does not matter how much credit I take, as long as I make my payments on time

There are two aspects to borrowing as far as credit scores are concerned -- how much credit and type of credit. Too much borrowing can adversely affect your credit score even if you pay every EMI of every loan on time.

Also, unsecured loans such as personal loans or too many credit cards also adversely affect your credit report. Further too many enquires for loans will reduce your credit scores.

4. I utilise my credit card to the maximum level but I make all payments on time hence it should not affect my credit score

Credit utilisation ratio, the percentage of credit actually used of the total credit sanctioned makes a strong impact on your credit score. The close you come to using your maximum credit limit, the lower is your credit score. So use your credit cards in rotation and do not stretch any to the limit.

5. My credit score only affects my standing for a loan

It is true that credit scores started out as providing the bank information about the credit risk of the borrower, however credit score are used for much more now. The Credit Information Companies Regulation Act (CICRA) permits institutions like banks, insurance companies, telecom companies, broking firms and asset reconstruction companies to access credit information companies' database.

Hence a bad credit score could potentially mean higher insurance premiums, rejection from a landlord to rent a house or even losing the job you wanted.