Ramesh wants to buy his dream bike, but when he applies for a loan, the bank says no. But why? Because of low credit scores. He was thinking paying off some of his dues would solve his problem fast; however, it still failed to work out.
Stories like Ramesh’s show how myths about debt and credit scores can lead to confusion and frustration. Let’s get into what’s true and what’s not about handling debts against knowing credit scores.
What Is a Credit Score?
Credit score is an online report card on your financial health—the ones that banks keep for the clients in the three-digit range usually from 300 to 900—banks interpret it to find out how likely you are to pay back the money that you borrowed. Such a high credit score signifies that you can easily get your loan applications approved. Such as getting a credit card with lower interest rates.
For example, a score of 750 is acceptable in India. If Ramesh was at a level of 780, he would have to pay 8% on the bike loan, but at 600, the figure increases to 15%. That increases the cost, which is almost twice.
Common Myths About Debt and Credit Scores
Many people, like Ramesh, fall for these best debt consolidation loan and credit score related common myths. Let’s separate fact from fiction:
| Myth | Reality |
| Checking your credit score hurts | False. Checking your score is a soft inquiry and does not affect it. Only hard enquiries (by lenders) can lower your score. |
| Carrying a balance improves your score | Not true. Paying your credit card bill in full every month is better for your score and saves you from paying extra interest. |
| Closing old accounts helps | Wrong. Closing old accounts reduces your credit history length, which can lower your score. Keep them open if they’re free. |
| All debt is bad | Misleading. Good debt, like education loans or home loans, can boost your score if managed well. |
How Debt Impacts Your Credit Score
Debt plays a significant role in your credit score. Here’s how:
- Credit Utilization Ratio:
This is the percentage of your total credit limit you’re using. A low ratio (less than 30%) is ideal. For Example, If your credit limit is ₹1,00,000 and you’ve used ₹20,000, your utilization is 20%. If you max out your credit card (₹1,00,000), your score drops because it shows you depend too much on borrowed money. - Payment History:
Late payments can hurt your score. For Example, Missing an EMI of ₹5,000 may reduce your score by 50–100 points. - Length of Credit History:
Older accounts show stability. Closing them shortens your history and can lower your score.
Let’s Break It Down
Here’s a simple chart showing the factors that affect your credit score:
| Factor | Weightage |
| Payment History | 35% |
| Credit Utilization Ratio | 30% |
| Length of Credit History | 15% |
| Types of Credit Used | 10% |
| New Credit Inquiries | 10% |
Let’s understand it with Ramesh’s Journey
When Ramesh learnt about these factors, he made three changes:
- He paid his credit card bills in full instead of just the minimum due.
- He reduced his credit utilization from 70% to 20%.
- He stopped applying for multiple loans in a short period.
In six months, his score improved from 600 to 720, and he got his bike loan at a reasonable interest rate.
Why Understanding Credit Scores Matters
Just like your school report card affects your future, your credit score impacts your financial opportunities. A good credit score helps you:
- Qualify for loans at lower interest rates.
- Get approved for higher credit limits.
- Build financial stability and confidence.
Conclusion
Managing debt and improving your credit score is not tough as long as you know the facts. Don’t fall prey to common myths such as “closing old accounts boosts your score.” or “carrying a balance helps.” In any event, try paying your bills on time, limit credit utilisation, and maintain a long credit history. Remember, Your credit score is in your hands. You too can make the changes, just like Ramesh.