What Are The Common Myths About Credit/CIBIL Score?

Lending decisions are largely based on the creditworthiness of the borrower. If a loan applicant is seen as highly creditworthy then he or she may be placed in a better spot to get a loan as compared to a person who earns many times more but has a poor credit history and, thereby, is seen as a risky character by lending institutions.

In general, creditworthiness is captured by a credit score or the CIBIL score, which has become synonymous given the first agency that started the practice in India, Credit Information Bureau of India Ltd (CIBIL).

This is essentially a three-digit number provided by independent agencies to every individual with a credit history. It lies between 300 and 900, with a higher number denoting higher creditworthiness and vice versa. But there are many nuances and several misconceptions and myths about the credit or CIBIL score.

Myths vs Facts

1. Income Is ‘not’ A Factor:

Many people think their credit score is dependent on their income profile. But this is false. The credit report, which is the main determinant of the credit score, does not capture the income. As a result, a person with a few thousands of rupees as income but with a good credit behaviour may have a higher score compared to someone earning lakhs in a month but with some missed loan repayments.

2. Checking CIBIL Score Does Not Affect The Score:

Another misconception is that by assessing the credit score they raise a flag and end up pulling down the score. The fact is that one should regularly check the score to make sure no error has cropped up to cause a problem in the future. However, one shouldn’t keep checking with quick frequency or allow lenders to do the same in quick succession as the system considers it a sign of credit hunger and thereby pulls the score down. It is fairly safe to check the report once a year.

3. Low Score Does Not Mean No Loan:

The most common mistake one makes is believing that low CIBIL score means the end of the world for availing a loan. The credit score is an important but not the only factor for assessment of a loan application. Various lenders have their own risk underwriting protocols and many do lend to people with low scores, albeit at a higher interest rate.

4. Having A Debit Card Is Not Enough:

The key factor in credit score is credit history and there is an assumption that having a debit card is good enough to build a score. But the fact is that a debit card is not enabling any act of credit. It simply allows one to use the money in the bank account. For building a credit history, a credit card or an actual loan is important. In fact, just having a credit card itself may not be helpful immediately as it takes some time to show as a credit.

5. Shutting Old Accounts May Not Boost Your Credit Score:

Closing old credit card accounts may seem to help the cause but actually it has another side. Closing a credit card account could actually increase the credit utilisation rate as the overall credit availability declines as one card is deactivated but the usage of the other card(s) could be same or more, thereby actually pulling down the score, in some cases.

6. CIBIL Score Can Be Checked By You or With Your Permission Only:

The score is kept safely and is not shared out of the blue to anyone. In fact, the score can be accessed by the person himself or herself voluntarily or by a lending organisation, only with express approval of the person.

7. Applying For Loan Need Not Lower The Score, But….:

Just like checking the CIBIL score does not affect the score, applying for a loan in itself does not pull the score down. However, if one is applying to multiple lenders within a short period then it has a negative side. This is because when one applies, he or she allows the lender to assess the credit score and if many lenders do the same in a short period, the borrower would be seen as desperate for money affecting the creditworthiness.

8. High CIBIL Score Need Not Automatically Mean Lower Interest Rates:

Loan approvals are based on various factors and while a high CIBIL score pushes up the chance of a loan, it may not also mean a low interest rate.

9. Erasing Bad Credit Behaviour Is Easier Said Than Done:

Some people think that if one has skipped an equated monthly installment, or EMI, on a loan but later pays up and even retires the whole outstanding it solves the problem. But the credit report retains such aspects and even if one has a high score, these notes in the report could affect the lenders decision on whether or not to lend.

10. No Credit History Means Clean Sheet?

Not having a credit history is actually bad as the report may not carry any element that goes to create a credit score. In fact, if one has just entered the job market, it may be helpful if one takes a credit card or even a small gold loan to start building a credit history for the future.

Conclusion

Credit scores have been actively used by lenders in India for years. But over time many misconceptions and myths have come to dominate the knowledge of the score. What affects the score and how one can go about improving it is something that every person should be aware of. Some basic factors to keep in mind is that one should repay loans in time and check the score periodically for correcting any mistakes.

A high credit score, however, is not a guarantee of getting a loan or a loan at low interest rates. There are several other factors at play. Still, reputed lenders like IIFL Finance do give a lot of importance to credit scores.

IIFL Finance provides a variety of secured and unsecured loans—from business loans to gold loans and personal loans—via an easy and swift process that is entirely digital. Moreover, it offers the most competitive interest rates and customized repayment terms to borrowers with strong credit scores.