How Outstanding Debt Affects Your Credit Score
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How Outstanding Debt Affects Your Credit Score

  • Highlights

  • High credit card balances pull down your credit score

  • Defaulted loan payments also affect your CIBIL score

  • Having different types of debt can improve your score

  • A low debt-to-income ratio is beneficial to your score

Your credit score is a number between 300 and 900 that gives lenders a sense of your history of debt accumulation and repayment. This score can affect the loan amount lenders are willing to offer you, the collateral they demand, and in some cases, the interest rate for repayment. The higher your credit score, the easier it will be for you to avail large loans at nominal interest rates.Here’s a look at how outstanding debt affects your credit score, and how to avoid some common mistakes relating to it.

Unpaid debt lowers your score, which goes up when you successfully repay

About 30% of your credit score depends on the amount of debt you owe at the time the score is taken. Large outstanding debts will reflect on your credit report and bring down your credit score, which will subsequently impact your eligibility for a personal loan or the personal loan interest rate you are offered.

Outstanding debt with late EMI payment reduces your score

If you have a history of defaulting on loans, or have a number of late EMI payments, this will reflect poorly in your credit score. It is imperative that you make all EMI payments on time. A good way of making sure you’ve set aside the appropriate sum for EMI repayment each month, is by using a loan EMI calculator to pre-plan your monthly budget. If you have any outstanding debt, pay it off as soon as possible, since you can only work towards repairing your credit score after debt settlement.


How outstanding debt affects your credit score

High credit utilization is a bad sign

The second most important factor to affect you credit score is your credit utilisation. Credit utilisation is the ratio of your credit card balance to your credit limit. A high credit utilisation indicates that a large portion of your monthly income is going towards credit card payments, and subsequently, that you’re more likely to default on your other loan repayments. To keep your credit utilisation low, you should make your credit card repayments regularly and on time, and also be mindful of not making too many large purchases on your credit card. If your credit utilisation is over 30%, you should consider not using your credit cards until you’ve paid off the outstanding debt.
Additional Read: 4 Ways to Consolidate Your Debt

 

A low debt-to-income ratio boosts your score

Your debt-to-income ratio is the ratio of outstanding debt in relation to your monthly income. Simply put, it tells lenders how much money you have coming in each month, and how much is going back out towards debt repayments. It is important to show that your income at the time of applying for a loan will be able to cover the cost of all of your debt repayments. The higher your debt-to-income ratio, the more likely it will be that you will default on your repayments. Make sure you are not getting yourself into more debts than you can justifiably repay. Either work towards increasing your income, if you can, or pay off your outstanding debts before applying for a loan.

 

Having different types of debt increases your score

A variety of well-managed debt proves to lenders that you are a responsible borrower and have proven, in the past, that you are capable of efficient loan repayment. Diversity on a credit report is proof of your financial capabilities much like a diverse resume may boost your eligibility for a job. A lender cannot rely on a high income and low credit card balance alone to make a decision, but evidence of past success may nudge them in the right direction. A debt consolidation loan is a good way of efficiently managing different types of debt by making only one EMI payment each month. Check your eligibility for the Bajaj Finserv Personal Loan for Debt Consolidation using this online calculator. Using it, you can combine your outstanding debt into one affordable loan up to Rs.25 lakh, that you can repay anywhere from 12 to 60 months.
Additional Read: 5 Things To Know About Loans For Medical Emergency In India

 

Having no debt history is no good!

Finally, a credit report that shows no debt isn’t going to do you any favours. If you have no history of borrowing money, a lender cannot see for themselves how efficient you are at repaying your loans or how well-balanced your financial assets are. Showing a diverse history of well-managed and efficiently-cleared debt, or even outstanding debt that is on its way to being paid, is better than absolutely no previous debt at all.

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