Your CIBIL score is a critical component of your financial health, influencing your ability to access credit facilities and secure favorable terms from lenders. However, despite its importance, there are numerous misconceptions and myths surrounding CIBIL scores that can lead to confusion and misinformation. In this comprehensive guide, we’ll debunk some of the most common CIBIL score myths and provide accurate insights to help you better understand and manage your creditworthiness.
1. Myth: Checking Your CIBIL Score Frequently Can Lower It:
One of the most prevalent myths about CIBIL scores Myth is that checking your score frequently can harm it. Many people believe that each inquiry into their credit report results in a decrease in their score.
Fact: Checking your own CIBIL score, also known as a soft inquiry, does not impact your score in any way. In fact, monitoring your score regularly is a responsible financial practice that can help you track your progress and identify any potential issues early on. It’s only when lenders conduct hard inquiries as part of a credit application process that your score may be affected, and even then, the impact is usually minimal and temporary.
2. Myth: Closing credit accounts can improve your CIBIL score.
Some individuals believe that closing unused credit accounts can have a positive impact on their CIBIL score, as it reduces their available credit and potential debt.
Fact: Closing credit accounts can actually have a negative impact on your CIBIL score, particularly if those accounts have a long history of on-time payments. Closing accounts reduces your available credit and can increase your credit utilization ratio, which may lower your score. Additionally, closing older accounts can shorten your credit history, which is another factor that contributes to your score. Unless a credit account carries high fees or poses a temptation for overspending, it’s generally advisable to keep it open to maintain a healthy credit profile.
3. Myth: Reducing Debt Removes Unfavorable Information from Your Credit Report
There’s a common misconception that once you pay off a delinquent debt or settle it with a creditor, the negative information associated with that debt disappears from your credit report.
Fact: While paying off or settling a debt can improve your financial situation and demonstrate responsible behavior to lenders, it doesn’t erase negative information from your credit report. The fact that you had a delinquent account or defaulted on a loan remains on your report for a certain period, typically up to seven years for most negative information. However, as time passes and you continue to make timely payments and exhibit responsible credit behavior, the impact of negative information on your score diminishes.
4. Myth: Income Level Affects Your CIBIL Score:
Some people believe that their income level directly influences their CIBIL score, assuming that higher income earners automatically have better credit scores.
Fact: Your income level is not a direct factor in calculating your CIBIL score. While lenders may consider your income when assessing your creditworthiness, your CIBIL score is primarily based on your credit history and behavior. Factors such as payment history, credit utilization, length of credit history, and types of credit accounts have a far greater impact on your score than your income level. Regardless of your income, managing your credit responsibly is essential for maintaining a good CIBIL score.
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5. Myth: Co-signing a loan has no impact on your CIBIL score.
Some individuals believe that co-signing a loan for a friend or family member has no effect on their own CIBIL score, as long as the primary borrower makes timely payments.
Fact: Co-signing a loan essentially makes you equally responsible for the debt, and the loan appears on your credit report just like any other credit account. If the primary borrower misses payments or defaults on the loan, it can negatively impact your CIBIL score. Before co-signing a loan, consider the potential risks and implications for your own credit profile, and ensure that you trust the borrower to manage the loan responsibly.
6. Myth: Paying Cash Builds Your CIBIL Score:
Some people believe that avoiding credit altogether and paying for everything with cash is the best way to maintain a high CIBIL score.
Fact: While paying cash for purchases may prevent you from accumulating debt, it doesn’t actively contribute to building your CIBIL score. Your score is based on your credit history and how well you manage credit accounts, so having a mix of credit types and demonstrating responsible credit behavior is essential for a strong score. If you never use credit, you won’t have a credit history, which can make it difficult to obtain credit when you need it. Using credit wisely and making timely payments is the most effective way to build and maintain a good CIBIL score.
Conclusion:
Understanding the truth behind common CIBIL score myths is essential for managing your credit effectively and making informed financial decisions. By debunking misconceptions such as the impact of checking your score frequently, the consequences of closing credit accounts, the persistence of negative information on your credit report, the influence of income level on your score, the ramifications of co-signing a loan, and the effectiveness of paying cash, you can take proactive steps to improve your creditworthiness and achieve your financial goals. Remember that maintaining a healthy CIBIL score requires responsible credit management, consistent payment behavior, and regular monitoring of your credit report.
Resource :- www.cibil.com