Hey there! If you've ever tried to get a home loan, personal loan, or even an education loan, you must have heard about credit scores, also known as CIBIL scores. Having a high credit score makes it easier to get loans approved with lower interest rates. So, let's clear up some common misconceptions about credit scores and understand the facts.
Is Checking Your Own Credit Score Harmful?
Many people think that checking their own credit score will harm it. This is a myth! There are two types of inquiries when it comes to credit scores: soft inquiries and hard inquiries.
Soft Inquiry: When you check your own credit score. This does not affect your credit score at all. So feel free to check your credit score regularly to stay informed.
Hard Inquiry: When lenders check your credit score because you applied for a loan. This can impact your credit score. But don’t worry, occasional hard inquiries are normal and won't cause much damage.
Closing a Credit Card
Another myth is that closing an unused credit card will improve your credit score. Actually, closing a credit card can sometimes have a negative effect. Your credit utilization ratio (the amount of credit you're using compared to your available credit) plays a crucial role in determining your credit score. Closing a card reduces your available credit, which can increase your utilization ratio and potentially lower your score. So, it's often better to keep the card active even if you're not using it.
Higher Income Equals Higher Credit Score?
Your income is not directly considered when calculating your credit score. Credit scores are based on factors like payment history, credit utilization, credit history length, types of credit accounts, and recent credit inquiries. While a higher income can help you manage loans better and make you seem like a lower risk to lenders, it doesn't directly impact your credit score.
Paying Off Loans and Your Credit Report
Paying off a loan is crucial for maintaining a healthy credit score. However, it doesn't immediately remove the loan from your credit report. Information about your loans and repayment history stays on your credit report for several years. For example, settled accounts can remain on your report for up to seven years. This history helps lenders assess your creditworthiness over time.
Does Using a Debit Card Build Credit Score?
Using a debit card does not affect your credit score. Debit card transactions are not reported to credit bureaus, so they don't contribute to building your credit score. Credit scores are based on credit accounts like credit cards, loans, and other types of credit.
