Credit history affects various financial aspects of our life. It is crucial to understand what credit score and reports are, how the score is determined and how one can maintain a good score. There is a lot of information available to guide you to towards a perfect credit score. But do not believe everything that you hear. There are many credit myths that are also doing the rounds. One wrong step can lead you in a wrong direction. Do not get misled by such myths that can actually tank your score.
Here are some misconceptions that can harm your credit score. Beware of them and get to know the real facts.
Myth 1 : Closing credit cards will improve credit score
Some people believe that having a number of credit cards has a negative effect on the credit score. They believe that closing some old unused credit cards will help in raising the score. But this isn’t the way credit score works. One of the major factors that determine your score is the credit utilization ratio. It is the amount of credit you use compared to the total available credit limit. For a good CIBIL score you should have high credit limits and you should use not more than 30% of it. Closing credit cards will reduce your total available credit limit and increase your utilization ratio. This will drastically reduce your score. Closing old credit cards also affects the “length of your credit history” factor that impacts one’s credit score. It reduces the average age of accounts and hence brings down the score. So if you really need to close some cards, close the newer ones. Another option is to close cards with a lower credit limit. Do a CIBIL score check to ensure that the impact of closing the account isn’t too drastic. Also, note that some credit card companies cancel the card if it is inactive for a long period. So charge small expenses to keep the card active.
Another misconception regarding closing credit cards is that if you close a card with a bad credit history, the information gets erased from the credit report and your credit score improves. The reality is that you cannot erase credit card’s history recorded by the bureaus in your credit report just by closing the credit card.
Myth 2: Not using credit cards is good for CIBIL score
You will see many tips on improving CIBIL score that advises people to pay off all their outstanding balances and stop using their credit cards. They proclaim that going on all cash basis and staying out of debt will help improve your score. But infact such a decision can be destructive for your score. In order to have a good CIBIL score, one needs to show how well one is capable of managing revolving accounts. For this one needs to keep the credit cards active by charging expenses and then paying them off every month. Even if you have a mortgage or any other instalment loan where you are making payments diligently you will not have that perfect score if you do not use credit cards. That’s because the CIBIL score calculation also takes into account the credit mix. A person who displays responsible behaviour in using both types of accounts will have a better score.
Myth 3 : You need to carry a balance on the credit card to raise your score
Using the credit card is necessary to build the credit score, but carrying a balance is not. You can work towards a good score if you pay off the entire amount when the bill arrives. By carrying a balance you will have to pay a high interest rate on the outstanding amount. This isn’t required at all to show that you can handle credit responsibly. In fact, paying off the entire bill amount will help in keeping the utilization levels low which is good for your score.
Hope this article cleared up the mystery that surrounds the CIBIL score. You will now have a better understanding of how the CIBIL score calculation works, and what you should and should not do to ensure a good score. But what if your score already took a hit because of these myths that you carried in your mind for long? Not to worry! If you are in need of funds you can avail for loans for low CIBIL score offered by many private lenders in the market.