Is my bad credit score going to ruin my financial prospects? Questions like these often come across us and we take hasty and wrong decisions owing to wrong information. It is important to know what is right and wrong when it comes to your credit score. It is your financial identity, and you must know how to make the right use of this score.

Credit scores play a crucial role in our financial lives, affecting everything from loan approvals to interest rates. Unfortunately, misconceptions and myths surrounding credit scores often lead individuals astray, causing confusion and potentially hindering their financial progress.

Adhil Shetty, CEO, Bankbazaar.com, explains, “Believing in credit score myths can lead to costly misconceptions and hinder your financial progress. It’s essential to separate fact from fiction and take proactive steps towards building a healthy credit profile. Don’t let these myths hold you back. Instead, focus on what you can do to improve your creditworthiness. Pay your bills on time, keep your credit utilization low, and maintain a diverse mix of credit. Regularly monitor your credit report, dispute any errors, and stay informed about your credit rights.”

“By understanding the truth and taking control of your financial destiny, you can pave the way towards a brighter financial future. We are also observing ‘Credit Score Awareness Week’ from Monday and that is why we also encourage right information to reach to our customers,” adds Shetty.

Let’s debunk the top 10 credit score myths to provide clarity.

Myth: Checking your credit score will lower it.

Fact: Checking your own credit score is considered a “soft inquiry” and does not impact your credit score negatively. In fact, monitoring your credit regularly is essential for maintaining a healthy financial profile.

Also Read: 10 ways to get out of debt before retirement

Myth: Closing old credit accounts improves your credit score.

Fact: Closing old credit accounts can actually lower your credit score. The length of your credit history is a factor in determining your score, and closing old accounts shortens this history. Instead, consider keeping those accounts open and using them responsibly.

Myth: Carrying a small balance on your credit card boosts your credit score.

Fact: Carrying a balance does not improve your credit score. On the contrary, it can increase your credit utilization ratio, which may negatively impact your score. Paying off your credit card balances in full and on time is the best practice.

Myth: Closing a credit card improves your credit score.

Fact: Closing a credit card can actually harm your credit score. It reduces your overall available credit, which increases your credit utilization ratio. Keeping the card open, especially if it has no annual fee, can be beneficial for your credit score.

Myth: Only people with high incomes can have good credit scores.

Fact: Income is not a direct factor in determining your credit score. Your credit score is based on your credit history, payment behaviour, credit utilization, and other factors. A person with a modest income can have an excellent credit score by practicing responsible financial habits.

Myth: Your credit score is the only factor lenders consider.

Fact: While credit scores are crucial, lenders also consider other factors like income, employment history, and debt-to-income ratio when making lending decisions. A good credit score enhances your chances but does not guarantee approval.

Myth: Closing delinquent accounts removes them from your credit report.

Fact: Delinquent accounts remain on your credit report for a specific period, usually seven years. Closing them does not remove the negative history. It’s important to address delinquent accounts by paying them off or negotiating a settlement.

Myth: Your credit score drops significantly if you apply for new credit.

Fact: Applying for new credit results in a temporary and minor decrease in your credit score due to the associated “hard inquiry.” This impact is typically short-lived, and responsible credit behaviour can quickly recover your score.

Myth: A perfect credit score is necessary for financial success.

Fact: While a perfect credit score (usually 850) is admirable, it is not a prerequisite for financial success. Good credit scores, usually in the range of 700 and above, are sufficient to access favourable loan terms and other financial opportunities.

Myth: Paying off debts immediately boosts your credit score overnight.

Fact: Paying off debts promptly is commendable and improves your creditworthiness over time. However, credit scoring models consider various factors, and it takes time for these positive actions to reflect in your credit score. Consistency and responsible credit behaviour are key.

By dispelling these credit score myths, individuals can make informed financial decisions and take steps to improve their creditworthiness. It is essential to rely on accurate information and seek guidance from reputable financial sources to ensure a strong and healthy credit profile.