Clearing your credit card debt in full usually improves your CIBIL score. It shows responsible credit behaviour that is seen positively by the lenders. Besides, it helps borrowers avoid interest charges.
So, if you have some credit card bill outstanding and are planning to clear it believing that this will reflect positively on your credit score, you are not wrong.
These are some of the reasons:
Lower credit utilisation ratio: Paying off your credit card balance in full lowers the credit utilisation ratio, which is the amount of credit you are using compared to the total credit available to you. A lower ratio is seen beneficial for the CIBIL score. A lower ratio indicates to lenders that you are using credit in a responsible way.
Lower debt load: By paying off your credit card balance in full, you’re reducing your overall debt load. Banks assess your debt-to-income ratio to assess your ability to manage additional debt. Lowering your debt load can impact this ratio positively, thus improving your CIBIL score.
Payment history: Making payments on time is one of the key factors in determining your credit score. Paying off your credit card balance in full demonstrates responsible credit behaviour and contributes positively to your payment history, which accounts for a significant portion of your credit score.
Avoiding interest charges: Paying off your credit card balance in full by the due date helps you avoid accruing interest charges. This financial responsibility reflects positively on your creditworthiness and can contribute to an improved credit score over time.
So, one can say that responsible credit management, including timely payments and keeping balances low, is key to maintaining a healthy credit score.
Frequently Asked Questions:
Why should you check your credit report?
Monitoring your credit score regularly helps you stay informed about your financial standing and any changes that may impact your ability to borrow money or access financial products.
How often should you check your credit score?
Most experts recommend to check the credit score at least once a year.
Does applying for new loan impact the credit score?
Each time you apply for credit, it triggers a hard inquiry that can temporarily lower your credit score. So, it is advisable to limit new credit applications, particularly if you’re planning to take out a significant loan soon.
Does a high CIBIL score lead to faster processing of loan?
Yes, it does lead to faster processing. A good credit score of borrowers enables banks to expedite the loan approval process.
How does the CIBIL score affect the interest rate on loan?
Lenders generally offer better terms such as lower interest rates and fees, to the borrowers who have high credit score.
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Published: 22 Apr 2024, 11:22 AM IST