Maintaining a healthy credit record is a very important financial goals that you should keep & constantly achieve. Your credit rating has a major influence on your finances such as deciding the maximum amount of credit you are eligible for on your credit cards, how big a loan you can apply, what rate of interest should be applicable on such debts, etc.
There are certain misconceptions about Credit Reports that have been misguiding all of us until today to the extent of making people overly cautious about them. Although this article is more for the benefit of NRIs (residing in US, UK, Singapore, Australia, etc), it is also relevant to Resident Indians as credit reporting in India is quickly becoming an increasingly organized sector due to which the below practices will gradually be applicable & useful to those of us in India as well.
Here is a list of 4 most common misconceptions that we must overcome to better manage our credit reports :
1. Checking your own score will reduce your score/rating :
Clients who apply for a loan through us, are always hesitant to request for a fresh credit report as they feel that doing so will lower their score. This is ABSOLUTELY FALSE! All the 3 credit reporting firms have confirmed on their respective websites that checking YOUR OWN SCORE/REPORT will not lower your score in any way. You can check your own score any number of times without having to worry about a reduced score. Only enquiries by external parties (and only HARD ENQUIRIES – which are not general enquiries but those from 3rd parties whom you have requested for credit) will affect your score.
2. The greater your income, the higher your credit score.
Your income has nothing to do with your credit report or score. Earning a very high salary or having massive profits in business does not necessarily mean you automatically have a good credit score & history. A person earning $9000/month (approx Rs.4,59,000) and another earning $5000/month (approx Rs.2,55,000/-) could have the EXACT SAME SCORE as long as both of them pay their bills on time, have borrowed within their limits, and have no default history etc.
3. Closing a credit card will boost your credit score.
When you close a credit card account, you will affect your credit utilization – which is simply the credit that you use (total amount borrowed on credit) compared to how much credit is available to you (total of all credit limits applicable to you). When you close an account, you’re lowering the denominator – the amount of credit that is available to you – which will increase your credit utilization percentage. A higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk (because you have greater borrowings to replay and hence chances of you defaulting on repayments are higher compared to someone who has less debt to replay).
4. Smaller debts like unpaid library fines, parking tickets & utility bills don’t affect your credit score.
It has now become standard practice for libraries & utility companies to turn over unpaid debts to collections agencies and also report such dues to credit bureaus. Such debts which end up on your credit report and negatively impact your credit score to a great extent. For example, one of our clients in the US who earns $4500/month (approx Rs.2,30,000/-), was denied a minuscule loan of Rs.20,00,000/- (approx $39,000) for not having paid library dues of $1.20 when he was in college! Moral of the story? Even the smallest of unpaid dues can make a significant dent in your credit report and hence make sure you clear off all dues as soon as possible, even the tiniest of ones.
Above are 4 popular misconceptions although there are a lot more of them to state! We hope this article gives you a better idea of how the credit rating system works and thus helps you better manage your personal credit score.
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By Jhashank Roy Chowdary (About the Author)G&C Global Consortium ™ Our Website | Our Facebook Page | Our Twitter Feed +9180-41520808/09/10 firstname.lastname@example.org