A solid credit score is crucial for your financial well-being, but many myths can obscure what affects it. Here’s the truth behind common misconceptions.
Credit scores are a crucial factor in determining an individual’s ability to obtain credit, including high-limit credit cards. A low credit score often due to limited credit history can lead to the rejection of credit card applications especially for high limits such as 5 lakh rupees. Factors like low income and a lack of previous credit activity can contribute to this issue, making it challenging to secure premium credit cards.
Here are some misconceptions about credit scores
A common misconception is that your income level affects your credit score, but it does not. Credit scores are based on your credit report details, including payment history, credit utilization and credit management. Whether you have a high or low income, your credit score depends on how you manage your credit. Poor credit habits, like missing payments, can lower your score while good practices, such as timely bill payments and low credit balances, can improve your score, regardless of your income.
Closing old accounts will not necessarily boost your credit score. Closing an old credit card or bank account can shorten your credit history which might negatively impact your score. A longer credit history helps lenders assess your credit behaviour more accurately. While closing accounts might save on fees or reduce fraud risk, it could lower your score. Long-standing accounts and those with high limits but low balances often positively influence your credit score. Therefore, consider the potential effects on your credit before closing any accounts.
Applying for a new credit card might slightly impact your credit score due to the inquiry made on your report. However, if you only apply once or twice and not too frequently, the effect will be minimal. Multiple applications in a short time can lower your score, as they might suggest financial instability. To avoid this, apply for new credit carefully and avoid making several applications at once.
It's a common myth that a low credit score makes you ineligible for any loans or credit cards. While a lower score may limit access to premium credit cards or favourable loan terms, there are still many options available. People with lower credit scores can qualify for various financial products. Additionally, you’re not doomed to a low credit score forever; there are ways to improve it over time.
Using a debit card does not affect your credit score. Debit cards are linked to your savings account and involve no borrowing, so transactions made with them do not contribute to your credit history or score. To build a credit score, you need to use credit cards or take out loans, as these involve borrowing and repayment, which are reported to credit bureaus and impact your credit score.