Think you know credit scores? These 9 facts will surprise you

Whenever you apply for a loan or a credit card, your credit score plays an important role in determining whether the bank will approve or reject your application. While most people know this fact, there are many interesting facts about the credit score that you may not know. So, let us understand these facts and why you should know about them.

Loan application or rejection: Apart from credit score, other factors also play a role

While a good credit score is an important criterion for a loan or credit card application, it is not the only one. The applicant’s age, income, debt-to-income (DTI) ratio, profession, career stability, city of residence, etc., also play an important role in the bank’s decision.

Banks specify the minimum and maximum age bracket, the minimum monthly salary or annual Income Tax Return (ITR), the minimum months/years with the current employer, etc. A DTI of up to 35% is considered good. Some banks consider a DTI in the 36 to 49% range. Some banks consider certain professions riskier than others, and some banks operate in limited cities and consider loan/credit card applications only from residents of those cities.

No loan or credit card equals no credit score

To build and maintain a good credit score, you have to avail a loan or use a credit card regularly. You cannot have a high credit score without using credit instruments. Based on their personal experience, some people will tell you that debt is bad and you should stay away from it.

However, to build or maintain a high credit score, without the need for a loan, you can use credit cards. Use the credit card for your regular monthly expenses and pay the monthly bill before or by the due date. Following this process will help you build and maintain a good credit score.

Your income has nothing to do with your credit score

Your income has no role to play in the calculation of your credit score. So, no matter how high your income is, there is no impact on your credit score. Whether your income increases, decreases or stops due to job loss, it will not have any effect on your credit score.

A high credit score can get you better loan terms

Banks consider a credit score of 750 or higher good for approving a loan or credit card application, provided the other eligibility criteria are fulfilled. The higher the credit score, the better. Some banks offer better loan terms to individuals with a higher credit score. These can include a lower interest rate compared to others, a higher loan amount or longer tenure, a discount on or waiver of processing fees, etc.

So, if you have a higher credit score, you can use it to negotiate better terms with the bank for your loan application.

Credit score calculation has more components than just timely repayment

Yes, timely repayment of credit card monthly bills and loan EMIs is important and has the highest weightage in credit score calculation. However, other components, like credit utilisation ratio, mix of secured and unsecured credit, ageing of loans/credit cards, frequency of credit applications, etc., also contribute towards credit score calculation.

A credit utilisation ratio of 30% or lower contributes positively towards increasing your credit score. Having a healthy mix of secured (home loans, vehicle loans, etc.) and unsecured (personal loans, credit cards, etc.) loans helps in increasing the credit score. The ageing of loans/credit cards matters with longer the loan tenure or the older the credit card, the better for your credit score. Making too many loan/credit card applications, too soon will impact your credit score adversely.

CIBIL is not the only credit bureau that gives a credit score

While most of us know CIBIL, did you know there are three more RBI-registered Credit Information Companies (CICs)? The four CICs that give and maintain credit scores are:

1. Credit Information Bureau (India) Limited (CIBIL)
2. Equifax Credit Information Services Private Limited
3. Experian Credit Information Company of India Private Limited
4. CRIF High Mark Credit Information Services Private Limited

All the above four CICs give and maintain a three-digit credit score. Each has its own algorithm to calculate the credit score. Hence, the same individual can have different credit scores with all four CICs inspite of having the same loans and credit cards.

Checking your own credit score multiple times doesn’t impact it

You can check your own credit score any number of times. Checking it repeatedly will not impact your credit score in any way. The credit score gets impacted only when a bank or NBFC does a hard inquiry to access your credit score and history to decide on your credit application.

Your credit score calculation doesn’t take into consideration your investments

Your credit score takes into consideration only your credit instruments like loans and credit cards. Your investments don’t impact your credit score in any way. So, whether you make new investments, continue with existing ones, pause existing ones, redeem them, etc., none of these actions will impact your credit score.

A credit bureau doesn’t edit or delete your credit information on its own

A credit bureau like CIBIL maintains your credit information. The basis of this information is the data that the CIC gets from the banks, NBFCs, etc., from whom you have taken loan(s) or credit cards. The data related to your credit applications, payment of loan EMIs or credit card bills, closure of loans/cards, etc., is passed on by banks/NBFCs to the CICs. The CICs input the data in their algorithm and generate the credit score.

Thus, a CIC doesn’t add, edit, or delete any information from your credit report on its own.

Making informed financial decisions to build and maintain a good credit score

There are a lot of facts about credit score that individuals are not aware of. Being unaware about these facts can sometimes lead to certain misconceptions or myths about credit score. In this article, we have covered some important facts that you may need to be aware of about your credit score. It will help you clear the air and avoid misunderstandings or developing myths. Understanding factors that impact or don’t impact your credit score will help you make informed financial decisions to build and maintain a good credit score.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.