Tuesday, 26 December 2017

“I Have the Best Credit Score”- The Big Misconception

You need a high credit score for a variety of reasons. For starters, it can help to get a loan quickly and easily. It can also give you an upper hand when negotiating the interest rates and terms with the lender, prevent disqualification for new job openings, improve overall mental health, and a lot more. However, there is a difference between having a high credit score and the best credit score.
What’s the best credit score?
The problem lies in the question itself because there is no such thing as the best credit or CIBIL score. Even if you strongly believe that you have the best CIBIL score calculation, you are wrong.  But why?
The first thing you need to understand is that there is no universal score which is accepted by all the banks and financial institutions around the world, or even across India. This is because there is not one but several credit rating agencies such as CIBIL, Equifax, FICO, etc. which have their own CIBIL score calculation methods and standards.
If you will obtain your credit report from different credit bureaus, you are most likely to find a different score in each one. This creates confusion for the “best credit score” concept right off the bat.
Why the difference?
Although the basic principle behind score calculation is the same with each credit agency, the formulae they use and the priority they give to the credit factors make the difference in the final result.
For instance, one credit rating agency may give more points for having more than 2 credit cards, while another one may not take this into account at all. Similarly, one may penalize 50 points for 3 consecutive late payments, another one 100 points.
Another reason why there is usually a difference between the credit score of different rating agencies is the scoring range they follow. For instance, CIBIL gives a score ranging between 300 and 900, Highmark 300 to 850, etc.
What’s the myth?
Having the best or perfect score is nothing but a myth. As we have already established there is a slew of credit scores that are accepted by the banks and financial institutions. So, even if you think you have the best score with one agency, it’s possible your score is just “average” with another.
An important thing to remember is that technically, you can’t have a perfect score. This is because your score reflects the amount of risk your credit profile carries, and there is always some risk.
So, if we take CIBIL for instance, then you should not strive for achieving a score of 900 (the highest on the scale) but rather around 750-850. This range is viable, possible, and more realistic.
Another misconception that’s relevant here is that once you have achieved the best score you can, your job is done. In other words, you don’t have to worry about your score once you have reached a certain level. This is not true.
While it’s important to go as high as possible on the credit score scale, once you have achieved, say 750 or 800, you can’t just can’t quit caring. You have to live by the same rules that you lived by to achieve that score if you don’t want it to come crashing down. In other words, you have to:
·        Keep repaying your loans and credit card bills on time and in full.
·        Ensure that the credit utilization doesn’t go above 30%.
·        Avoid applying for a loan at multiple banks at the same time.
·        Keep on monitoring your credit report to find and rectify mistakes and discrepancies that affect the credit score.
·        Keep an eye on your debt at all times and don’t let it increase.
The Bottom Line
The “bulk” of this blog is that you should never rest on your laurels in the context of score building. You should always aim for achieving the highest score possible, and when you do, take measures to ensure it doesn’t drop again.

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