Why Gen Z Is Getting Credit Scores All Wrong And How To Fix It

A credit score is a three-digit number that shows how well you handle your financial responsibilities. In India, the most common credit score is from CIBIL, and it ranges from 300 to 900. A higher score indicates good financial behaviour, while a lower score suggests risky or poor credit habits. This number is crucial as it affects your ability to secure loans, credit cards, and even rent apartments. Despite its importance, many people misunderstand what affects their score and how to build it correctly.

Common Myths Gen Z Thinks About Credit Scores

The biggest myth is that credit score building occurs if you use debit cards or digital payments (such as UPI transactions). Although these gadgets are fantastic for money management, they do not assist you in building your credit score. Your credit score will be determined by your borrowing and repayment history and not by the number of times you've made payments via your bank account.

Another myth is that having a credit card automatically increases your credit score. While a credit card can be useful in improving your score, it's only going to help you if you use it responsibly. If you fail to pay bills on time or use too much of your credit limit, your score will suffer instead.

The Truth About Credit Scores

What really influences your credit score? There are a few major contributors to this significant figure.

1. On-Time Payments: The most critical aspect of your credit score is your payment history. It may take only one missed payment to decrease your score substantially. Be sure to pay your bills, loans, and credit card bills on or before due dates. Remind yourself or sign up for auto-pay features to ensure you never miss a deadline.

2. Credit Utilisation: This is the amount of available credit you're utilising. If you have a credit card with a limit of Rs 50,000 and you're spending Rs 45,000, your credit utilisation ratio is high. It's a good idea to use no more than 30-40 per cent of available credit. A high rate of use might be an indicator to lenders that you're borrowing too much money, which may cause them not to want to lend you more.

3. Credit History: The longer your credit history, the more it helps your score. What this implies is that taking new credit cards and keeping them for a while will reflect positively on your credit score. If you're beginning, get yourself a secured credit card that has easier approval terms and serves to create credit history.

How To Build and Maintain Your Credit Score

While the fundamentals matter, there are some techniques which can improve your credit score without overloading you.

• Begin Early, Even with Limited Amounts: One of the best things you can do is begin establishing your credit score early. Even if you have a limited credit limit, using it responsibly can put you on the path to success in the future. Paying off small, manageable loans or using a limited credit card limit can establish a good credit history that will benefit you later.

• Don't Close Old Accounts: Closing credit accounts that you don't use may seem like an easy way out, but actually, it will hurt your credit score. Closing a long-standing account reduces your credit history, and credit history is a significant consideration in the calculation of your score. Keep old accounts open but only use them sporadically to prevent maintenance fees.

• Diversify Your Credit Mix: A mix of different types of credit can help your score. This does not mean you should go out and apply for every credit card and loan you can, but over time, a combination of revolving credit (such as credit cards) and installment loans (such as personal or auto loans) can be beneficial.

Knowing how credit scores function is a necessary step towards personal finance management. To Gen Z, it means dissociating from the myths and concentrating on the behaviours that actually count: paying on time, having low credit utilisation, and establishing a good credit history over time.