Your credit score is a three-digit, numerical expression of your creditworthiness. It is computed by credit research agencies such as Experian and CIBIL with the help of data shared by your lenders. If you've ever taken a loan or credit card, your credit use has been shared by your bank or lender to the credit agencies. The No. 1 factor that shapes your credit score is your repayment of loans or credit card debt. If your EMIs and repayments have been timely, you have little to worry about. But late payments, defaults, burgeoning credit card debt, and having too many concurrent loans can pull your score down. That said, there are several misconceptions about what impacts your credit score. Here's a quick look at items that do not shape your score.
Your income, age & employment status
What you earn, how old you are, and where you work have no direct bearing on your credit score. You may be a high net worth individual with a low credit score; conversely, you may be just starting in your working life with a low income, yet have a good credit score due to timely repayments of your credit. If you pay your EMIs on time, your credit score will be good. However, unemployment or loss of income may impact your repayments which, in turn, can pull your score down.
When You Check Your Score
Any time you apply for a new loan or credit card, the bank or lender initiates a check into your credit history. This is called a "hard" check. Each such check marginally reduces your credit score. Hence it is not advisable to apply for too many loans and credit cards in a short span of time. However, when you check your own score, it's termed a "soft" check. This has no bearing on your score. You are entitled to avail one free credit report per year from credit agencies. You can also avail additional, paid ones if you need to.
When you pre-pay your loan
Pre-paying on your loan, or even pre-closing it, in most cases does not harm your credit score. In fact, being ahead of your payments will likely have a positive impact on it. What you want to avoid is a loan "settlement" – a situation where you default on your loan and the lender provides you with the option of part-paying your dues and closing your account. This will harm your creditworthiness and the settlement will reflect on your credit report, creating problems when you apply for a new loan or credit card.
Your utility payments
The payments or non-payments of utilities (telephone, internet, electricity, water etc.) have no bearing on your credit score – at least not yet in India. In western nations, alternate credit scoring techniques have been developed, and these are being slowly tried in India. These techniques use data points that credit agencies don't. If you didn't have a credit history (due to a total absence of borrowing), your prospective lender may refer to other data points such as your social media history or your utility bill payments to assess your creditworthiness.
Your family's credit history
How your friends and family manage their credit will not directly impact your credit score. You don't gain or lose credit points for their borrowings. But there are some exceptions. If you have a joint loan with a family member, you're liable for payments. If you have provided add-on credit cards to your family members, you're liable for their payments being the primary cardholder. Also, if you've stood as a financial guarantor for someone's loan, you're liable for ensuring payments if they default, and your failure to repay this loan will dent your credit score.
How many credit cards you own
You can own as many credit cards as you're eligible for. The number of credit cards you own will not harm your credit score. Owning multiple cards for long periods will reflect positively upon you, as these are open credit lines that you've owned without defaulting. However, if you had debts on those cards that you were unable to repay, your credit score will be harmed.
As a general habit, keep a track of your credit score by downloading your free reports every few months. If your score is below 750, take corrective steps like repaying all your dues in time, getting credit report errors corrected, if any, etc. to improve your score.
The writer is CEO, BankBazaar.com
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