Credit cards are certainly an easier and more convenient way to pay your bills and cover expenses – but if left unpaid, an outstanding credit balance can affect your CIBIL score and make it difficult to avail of loans. This is because lenders and financial institutions check your CIBIL score to get a glimpse of your credit history – regardless of whether you have an outstanding balance credit card, payment defaults, or so on – before approving the loan application. Read on to know how an outstanding balance affects your credit score.
6 Ways How Outstanding Balance Affects Credit Score
Here are a few ways that explain how having an outstanding debt affects your credit score:
1. Unpaid Debt Reduces CIBIL Score
Several factors come into play when deciding your credit score. However, about 30% of the score is based on the debt amount you owe at that time. Huge outstanding debts reflect on the credit report and lower the CIBIL score. This, in turn, affects your loan eligibility.
2. Delayed EMI Payments Lowers Score
Delaying or defaulting repayments consecutively reflects poorly on your CIBIL score. Therefore, aim to settle your monthly EMIs on time. Setting aside a fixed amount for EMI payments with the help of a calculator or planning your monthly budget and expenditures in advance can be a smart way of ensuring that you never skip an installment.
Also Read: How Does Your CIBIL Score Affect Your Home Loan Application?
3. Excessive Credit Utilization Negatively Affects CIBIL Score
Credit card utilization is yet another crucial factor affecting your CIBIL score. By credit utilization, we mean the ratio of your credit card balance to your credit limit. If your credit utilization exceeds 30%, it means you are spending a substantial portion of your income on credit card payments, which consequently leads to payment defaults. Hence, to avoid high credit utilization, be regular with your repayments. You must also avoid making huge purchases on your credit card. Try not to use it until the debt is settled.
4. Not Having a Credit History Makes It Worse
A credit report with no history of debts is not going to benefit you. This is because if you do not have a record of borrowing funds, the lender fails to see whether or not you are capable of paying off the loan amount or how well-balanced you are financially. If you are able to show a diverse record of well-managed and efficiently settled debts, or debt payment that is underway, you may still have a better chance at getting a go-ahead from the lender than you have with no previous record at all.
5. A Low Debt-to-Income Ratio Improves CIBIL Score
The debt-to-income ratio refers to the ratio of your debts to monthly income. It simply explains your monthly salary and the amount that drains out towards settling outstanding debts. When applying for credit or a loan such as Home Loan or Loan Against Property, you should be able to show the lender that you have a substantial income to cover all your debt repayments.
6. A Variety of Debts Boosts CIBIL Score
A wide range of efficiently managed debt indicates you are a responsible borrower with a proven record of timely repayments. Variety in the credit report, thus, proves your financial worth and boosts your eligibility. Although a lender cannot solely depend on high income and low outstanding balance credit card, a review of the previous settlement may still give them assurance of timely repayments.
Now that you have gone through the reasons why outstanding balance affects CIBIL score, you should know what a good CIBIL score looks like.
What is a Good CIBIL Score?
Having gone through the various credit score factors, you should work towards clearing outstanding payments and achieving an ideal credit score that would help you avail of loans and credit. While the CIBIL score ranges from 300 to 900, lenders demand a score of 750 to be eligible for approvals. A little lower on the scale, say between 625 and 750, can also be considered a fair score. However, a score below that, between 300 and 625 is considered low and needs to be improved.
Make sure you pay off your dues on time and monitor your credit report regularly. You should also check your CIBIL score at regular intervals to track improvement and ensure there are no discrepancies. This will help you maintain a good CIBIL score and experience swift approval in case you decide to apply for a loan.
Also Read: Tips to Improve Your Credit Score
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