Is having debt good for your credit score?
With the banking regulator insisting on fair and transparent lending practices, it is becoming mandatory for every lender to look at your credit score before it can decide whether you are eligible for a loan and at what interest rates should the loan be disbursed to you. Lenders access your Cibil report and score to assess your credit worthiness. While a good credit score is your doorway to loans at cheaper rates of interest, poor credit scores on the other hand may mean rejection or loans at expensive rates.
In order to maintain a good credit score, you first need to figure out what is it goes in towards building a good credit score, and what you may be rewarded for.
Debt is not a bad thing
Even in this day and age, where almost everything is available on credit, some Indians think that having any kind of debt may spell financial doom for them. Well, that is not true, and havingno debt or having a single kind of debt does not fetch you a higher credit score.
Debt is not a bad thing by itself, but being in bad debt is. You can maintain a good Cibil score if you have a good mix of secured loans such as a home loan or a car loan and personal loan that is unsecured. As long as you make regular and timely repayments on these loans, you have no reason to worry and can be assured of maintaining a good credit score. Also, if you can foreclose the expensive loans, such as personal loans or student loans if you have a bit of extra cash in hand, your score will move up.
Voluntary debt may spell trouble
The only debt element that usually gets people into trouble with their debt is the element of voluntary debt or credit cards. There is no denying that they are supremely convenient, but if you do not use it judiciously it can land you in a soup. Your credit score is impacted negatively if you do not make timely repayments in full on your card or are perilously close to the utilization of credit limit. Late payments can shave-off a lion share of your credit score. 30% of your credit score is determined by the kind of debt that you are servicing and if you are found to be in the trap of revolving credit (the kind that happens when you only make a minimum payment on your card) your credit score gets impacted negatively.
Credit hungry behavior works against you
Just because you are spoilt for choice where credit is concerned, does not mean you will have to avail it! If you have too many applications for loans or a number of credit cards that you are using carelessly it will have a negative bearing on your credit score as it means your debt burden is high.
In order to be eligible for a loan when you really need one, it is imperative to maintain a good credit score. By having a good mix of debt and servicing it regularly, you can maintain a good credit score and be loan ready at all times.
Rajiv Raj, Director & Co-Founder, creditvidya.com
The views expressed in this article are author´s own
