If you are seeking a loan, your credit score will be a determining factor as to whether or not you will be approved. Your credit score is a very important rating that makes you eligible or ineligible for a loan. A credit score is a 3-digit number that is specific to you – taking into account how you’ve dealt with credit in the past.
It is a standard parameter referred to by all financial institutions in order to process your loan application. Other factors like pay scale, age, gender, loans already granted are also influential in the approval of your loan amount, but your credit score is the decisive factor. In simple terms, a credit score is a score that depicts your credit history and your payback behavior. It’s important to understand how to check your credit score.
There are many myths that people have relating to credit scores that need to be addressed to clear up all the confusion about how your credit score actually works.
Rich people have a better credit score: This is the biggest myth! A credit score is the data derived by the behaviour of a person having a loan. If a person is rich and has never formally borrowed money from a bank, the person doesn’t have a credit score. Having a good financial background, i.e. having a lot of family money will not fetch a higher credit score.
Settled debt does not reflect on the credit score: Your credit score is based on the history of all the credit you have ever taken. A loan which has been paid back and settled is also considered while calculating the credit score.
The more credit cards you have, the better the rating: Credit cards are just one way that you can borrow money. Having multiple cards does not contribute to your score, instead, it’s how you use the cards that you have that makes an impact.
Credit scoring is done by banks: Many of us have accused the banks of giving us a low score, the accusation is inaccurate. No bank creates a credit score, they only refer to it. The credit scoring agencies gather information from all the banks. This information is mathematically churned and the agencies produce a credit score report of every individual who has a credit history. All the banks and other lending institutions refer to this report whenever they process a loan application.
It is impossible to get loans without a credit score: This is partially true. Having a bad credit score will make it difficult for you to get the loan or you may get a loan at a higher rate of interest. But not having a credit score does not prohibit you from getting loans. No credit history means that there has been no borrowing by you from any bank. It means you are applying freshly for a loan.
According to Family Money Magazine, your credit score is needed and is a part of your financial status. It is important to maintain a good credit score as a bad credit score may affect your financial reputation and prohibit you from availing offers on loans.
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