What GenZ gets wrong about credit scores: An essential guide

Credit Score: Whether you are applying for a car loan, home loan, personal loan, or even a credit card, commercial banks tend to check your creditworthiness. This is measured by a three-digit number between 300 and 900, known as a credit score.

Numerous factors influence your credit score, including your payment history, overall credit mix, and credit utilisation ratio (CUR). It is not determined by avoidable factors such as whether you hold a credit card or not.

There are several misconceptions about credit scores, particularly among Gen Z and youngsters. Here, we aim to bust some of these common beliefs.

These are some common misconceptions which deserve to be busted:

I. Credit scores reflect how much debt you have: While the amount of debt does matter, factors such as your credit utilisation ratio, payment history, and the age of your credit accounts carry more weight in determining your credit score.

II. Discontinuing old accounts strengthens your credit score: On the contrary, closing old accounts can hurt your score by shortening your average credit history and increasing your credit utilisation ratio.

III. Missing one payment does not matter: This is untrue. Even a single missed payment can adversely impact your credit score, especially if you are just starting out. Payment history is a crucial factor, accounting for nearly 35 per cent of your score.

IV. You only need one credit card: While one card is fine to start with, having a mix of credit types and a long credit history can help boost your score in the long run.

V. Debit cards also help in score: Debit card activity does not impact your credit score, as it is not reported to credit bureaus like CRIF High Mark. Only credit products, such as credit cards and loans, affect your score.

VI. Checking your own score hurts it: This is known as a soft inquiry and has no impact on your score. Only hard inquiries can affect your score, and even then, the impact is minimal.

Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.