Impact Of Credit Card Balances On Credit Score

Sep 2018 | Team Rubique

Credit Card balance can have a direct adverse effect on credit score. For somebody who has consistently been a defaulter, his credit score can go for a toss in no time due to the outstanding unpaid bills. Alternatively, on maintaining a disciplined payment habit, the credit score may improve drastically leading to healthy creditworthiness for future loan approvals.

Leading financial experts suggest lowering one’s credit card utilization ratio to brace up the credit scores. Credit utilization refers to the amount of available credit being used at any given time. It can be calculated by dividing the total credit card balances by the total credit card limits. The ensuing percentage is the part used by most of the credit scoring models because it’s often linked to lending risk. It is recommended to keep the overall credit card utilization below 30%. To the creditors, this gives out a positive impression of the customer’s responsible credit usage, to a great extent.

Owning a credit card reflects well on the credit score: The credit scoring system looks for a combination of both revolving debts such as credit cards with variable interest rates, and installment debt such as car/ house loans that have a fixed Equated Monthly Instalment (EMI) over a set period of time. However, it is not mandatory to own a credit card. One can also build a good credit score via other types of loans like mortgages, etc.

Opening credit card accounts: The lending bank’s first job is to make a credit check on the applicant before issuing him the credit card. Therefore, one’s priority should be to maintain healthy creditworthiness. However, it is advisable that one must abstain from dropping in too many applications at several banks around the same time. The reason being, a large number of credit enquiries in a short time can lower one’s credit score drastically.  This goes on to show that such people are credit hungry and may end up in financial trouble in the long run. Also, one must wait before applying for another hefty credit/ loan transaction to avoid a sharp dip in the credit score.

Closing credit card accounts: Instead of closing down unutilized accounts, experts suggest keeping the oldest loan account active if possible. Same applies for credit cards also where the borrower should hold on to it to keep himself active in the scoring record. Closing such an account leads to an increase in the credit utilization ratio because of less available credits. A strong repayment track record of such a bank account helps in building a faith with the lenders who see it as a sign of customer reliability. This acts as a driving force behind credit score progress. In case the borrower is spendthrift, instead of closing the account permanently, a good idea would be to simply cut up the card or put it away out of sight.

Delay in credit card payments: It is of paramount significance that all credit cards must be cleared off any outstanding dues. This is one of the key factors whereby the credit score can be improved. Financial discipline and healthy credit behavior are what lenders look for in their clients. Even if the customer diligently pays off his monthly outstanding but ends up as a defaulter once or twice, such unpaid balance can hold back the overall credit score of the customer. Therefore, for a score boost, always pay the bills on time.

Keep updated knowledge: Every situation is unique! The way somebody uses his credit card may not work for another. Ideally, one must analyze the factors which might lead to his credit score fall and find a solution for it accordingly. For instance, defaulting or regular late payments can be rectified if his knowledge of the credit account summary stays up-to-date every month.

A credit score is a way to know where one’s credit status lies at a given point in time. It carries a summary of every applied loan and other debt accounts in the form of the account balance, payment history; and the number of years the account has been active. All these factors add on to the credit score. Each factor carries its percentage ratio in the credit score sheet.

  1. Payment history adds up to 35% of the score
  2. Level of debt adds up to 30% of the score
  3. The span of credit history is 15% of the score
  4. Number of inquiries and mix of credit carry 10% each

Maintain a good credit balance: Although universally, everybody would agree that the best credit balance is “NULL”; it does sound ambiguous. Keeping the credit balance to a 30% threshold and paying off all outstanding dues before the account statement closing date does sound achievable. It is on that date when the banks issue the credit card report to the credit bureaus like CIBIL; etc.

On maxing out the credit cards regularly: Experts advise to stay within the peripheral of a 30% credit limit. Maxing out regularly would reflect on the credit reports even if the customer pays it down before the statement is generated. The report would list the “high balance: until the bank reports a new lower balance to the bureau. Since it is not mentioned on the report when the balance was paid, many lenders are misled into picking up a wrong notion about credit indiscipline of the customer. Future communications with lenders would mean thorough scrutiny of these reports resulting in the delay in loan approval.

A good way to build a good credit score quickly is to make hefty payments on the credit balance. The credit score will automatically improve once the balance or the credit utilization ratio comes down. Clearing off a maxed out card can result in a huge leap regarding credit score enhancement within a short span of time.