Skepticism is an innate part of human nature. Even the most trusting people can be skeptic about certain events, people or things. Lenders are no different. When a person applies for an unsecured personal loan, the lenders have no way to identify a defaulter just by their application. That is why it is essential for them to check the financial history of that individual. The credit score is an indicator of this history. In this context, there has been a buzz around the word “Zero Credit Score”. Let’s find out what the hype is about and debunk everything there is to know about it.
A person is said to have a zero credit score when they have no financial credit record in the past six months. This essentially means that they do not have any existing debt and have not been using their credit cards. One must note here that a zero credit score does not mean that the person has never owned a credit card or that they have never borrowed money from a financial institution. It just means the absence of debt in the past six months. When a person has never had a confrontation with debt, it is known as being New to Credit and these people are called “credit invisible” people.
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A zero credit score is also different from a bad credit score because a bad credit score is caused due to one of the following reasons:
— Default on dues
— High credit utilization ratio
— A high debt to income ratio
— Other ill financial habits
A bad credit score is an indicator that the person has been irresponsible in handling their debts but a zero credit score is indicative of the fact that there has been no debt with the person in the past six months and nothing about their creditworthiness. They could have been good or bad with their credit, it shall remain uncertain till we dig deeper.
A lot of people consider the absence of debt as a sign that they are financially sound. However true that might sound, it is not always the case. The stigma around the word debt has led us to believe it is a bad thing. A good credit score can be obtained only when a person handles debt in a responsible manner. In case there is no debt, there is no reference to rely upon and figure out how the person will handle future debt. Hence, a zero credit score is something that is not good for your financial health.
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The zero credit score zone is very similar to the Friendzone that a lot of people keep talking (read: complaining) about. You have to take action not to get in there and for getting out, you just have to take action that you should have, again. Just start using your credit card responsibly. Pay your credit card bill on time and in full. Keep the credit utilization below 40% and in no time, you will be back in the good credit zone.
Always remember, the internet is filled with all sorts of information, both true and untrue. Keep in mind not to become a part of the herd and follow the buzz blindly. Do let us know in the comments below if you have any questions related to personal finance. You can also check out the best interest rates on the IndiaLends app and website. Until next time!
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