Impact of Paying Minimum Amount Due on Credit Card

Credit information companies assign a credit score to borrowers. The credit score is a three-digit number between 300 and 900 that indicates a borrower’s repayment capacity and creditworthiness. TransUnion CIBIL is the most popular credit information company in India and the credit rating or score it assigns to borrowers is known as the CIBIL score. A good CIBIL score range is anything between 750 and 900. Borrowers whose credit score lies in this range get offered Home Loans at low-interest rates and enjoy other beneficial loan terms, such as a long repayment tenor and higher loan sanction.  

Credit information agencies decide a borrower’s credit score based on the information provided to them by lenders and financial institution. If you are using a credit card, your credit card company will send information regarding your repayment habits to credit information agencies. If you are someone who always pays EMIs on time and clears more than the minimum amount due, your credit score will automatically be in the good CIBIL score range. However, if you are someone who pays only the minimum amount due, you will have a low CIBIL score. In this article, we look at how paying only the minimum amount due keeps a borrower from having a good CIBIL score.  

How Does Paying Minimum Amount Due on Credit Cards Impact Your Credit Score?

Credit information agencies assign credit scores to borrowers based on several different factors and one of these factors is the credit utilization ratio. The credit utilization ratio is the ratio of the revolving credit that a borrower is using to the total credit they have available. How is credit utilization ratio calculated? Follow these steps to calculate your credit utilization ratio:  

• Add all the outstanding debt you have on all your credit cards.  
• Next, add the total credit limit you have available on all your credit cards.  
• Finally, divide the outstanding debt by the total credit limit you have available to get your credit utilization ratio.  

The credit utilization ratio is important as it helps a lender understand how dependent you are on credit.  Borrowers who have a high credit utilization ratio are borrowers who are highly dependent on credit. Such borrowers are considered risky clients by lenders and therefore, lenders do not approve loan applications from such borrowers. Borrowers who have a low credit utilization ratio, on the other hand, receive quick approval on their loan applications. In general, a credit utilization ratio of 30% or lower is considered ideal by borrowers.  

When a borrower pays the minimum amount due on their credit cards consistently, their credit score does not get affected. However, when a borrower pays the minimum amount due for an elongated period and then misses a credit card payment, their credit utilization ratio goes up. The same happens when a borrower keeps paying the minimum amount due on their credit card and using their credit card to take care of various expenses. When a borrower’s credit utilization ratio goes up, their credit score goes down. Therefore, borrowers are advised to use their credit cards cautiously and try and clear the entire amount due on their credit cards each month and not just the minimum amount due. Borrowers are also advised to never make big purchases on their credit card if they do not plan on clearing the entire amount due before the next billing cycle. 

Now that we understand how paying only the minimum amount due impacts a borrower’s CIBIL score, let us look at what can borrowers do improve their credit score and their chances of loan approval.  

Read Also: Know What CIBIL Score is Considered Good for a Home Loan 

How You can Improve Your Credit Score?

If you want to avail of a good loan deal, make sure you have a good CIBIL score, i.e. anything about 750. If your credit report shows that you do not have the required CIBIL score, here’s what you can do to improve your credit rating and your chances of loan approval.  

• To start with, maintain a clear repayment record by paying all your credit card bills and loan EMIs on time. Your credit repayment history makes up 35% of your CIBIL score and therefore, it is crucial that you maintain a clean repayment track. 
• Get in the habit of clearing the entire amount due on all your credit cards and not just the minimum amount due. If you think you won’t be able to clear the entire amount due, postpone the expense.  
• Apply for credit only when you need it. Too many credit card and loan applications lead to a borrower having too many hard enquiries, which in turn, lead to borrowers having a low CIBIL score. So, refrain from applying for too many loans and credit cards in general.  
• Lastly, check your credit report for errors from time to time. Sometimes, lenders pass wrong information to credit information agencies, which leads to borrowers having a low CIBIL score. Borrowers must check their CIBIL score from time to time and make sure there are no errors in their credit report.  

When it comes to loans of any type, the importance of CIBIL score cannot be undermined. If you are planning to apply for a loan of any type, make sure you have a good CIBIL score, i.e. anything above 750. Having such a credit score will not only help you get quick approval but also avail of a loan on highly lucrative loan terms and conditions.