When Prerna applied for a credit card with a comparatively high limit of 5 lakh rupees, in the first year of her job as a junior fashion designer, her application was denied on the basis of a low credit score, owing to her lack of credit history.
During her conversations with her peers and seniors, she came across a variety of opinions on the omnipotent credit score – her low annual salary was to blame, her credit score would remain low for the foreseeable future since she did not have a credit history to fall back on thereby preventing her from enhancing her credit score and thereby, availing a premium credit card.
Confused and dismayed, Prerna began to dig deeper into credit scores, and she came across the following myths which were being propagated due to a lack of knowledge about the topic.
Your income is the culprit – Your credit score is determined by the details in your credit report, and your income is not included in this report. Consequently, even with a salary of 15 lakh rupees, you could have a low credit score if your credit behaviour is poor. Conversely, someone with a lower income can have a high credit score if they maintain a good credit history, such as paying bills on time and sticking to balanced credit utilisation. This highlights that income level does not directly impact your credit score; responsible credit management does.
Having a balance on your credit card can amp up the credit score– If you keep a balance amount on your credit card, which is the amount you still need to repay, for a long tenure, your credit score may become worse, even as you continue to pay interest and therefore lose money. This balance tends to impact your credit card utilisation rate, which can, in turn, push down your credit score so make sure to clear your monthly dues in a prompt manner.
You do not need to worry about your student loans– Your credit score is influenced by more than just your credit card payments – timely payments on all bills, including utilities, student loans, mortgages, and medical bills, are crucial. To avoid missing payments, consider setting up autopay mandates and check if your student loan company offers a discount on your interest rate if you enrol for the same, as it will make it easier for you to stay on top of your finances.
You cannot improve your credit score– A credit score reflects your financial history, but a low score is not permanent. You can improve your score over time by developing good credit habits – following sound practices and tips can help you build a good score, allowing past negative transactions to fade. Typically, transactions remain on your report for about three years, while details like bankruptcy and payment defaults can stay up to 10 years. However, it is possible to improve your score by consistently managing your credit responsibly and demonstrating positive financial behaviour.
Closing old accounts will improve your score–Closing an old credit card or bank account can shorten your credit and financial history, which might in turn negatively impact your credit score. A long credit history provides lenders with a clearer picture of your credit behaviour so remember that while closing an account can save on annual fees and reduce fraud risk; it could also lower your score. Indeed, accounts that have been open for a long time and those with high credit limits but low balances can positively influence your credit score.
Applying for a new credit card will reflect poorly on your credit score– If you are thinking of applying for a new credit card, for better benefits, do not fear its impact on your present credit score, unless you make it a practice of applying to multiple service providers within a brief period of time. This is because, every time you put in an application, an inquiry is made into your credit report and multiple inquiries, in a short time-span, can indicate financial difficulties, leading to a lower score. It is advisable to therefore apply to a single reputed service provider, instead of randomly tapping multiple possible avenues.
Once she understood the varied myths linked to the ubiquitous credit score, Prerna found it much easier to navigate the credit card ecosystem. She began her journey by applying for a credit card with a lower limit of 1 lakh rupees and worked towards building her credit history by utilising only 30% of her limit. She was also extremely religious about her repayments and within a year, her credit score was significantly better, making her future credit voyage that much easier.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
