Credit scores have become extremely important for getting loans and hence maintaining a good credit score is important. Individuals with a bad credit score are more often politely declined loans.
Minimum amount due on credit card and CIBIL Score
It is important to note that when you pay the minimum amount on your credit card, it does not affect your credit score. Let us give en example. Normally, banks allow you to pay an outstanding of just 10 per cent of your total credit card outstanding.
Let us say as an example, if you have Rs 10,000 as outstanding on your credit card, you are allowed to pay just Rs 1000. When you pay this amount, your CIBIL Score may not be affected.
But, remember that the amount of Rs 9000 can carry a very high interest rate of up to 36 per cent per annum.
Now, by paying the minimum amount due on credit card may not affect your CIBIL Score, there may be some precautions that you need to take. For example, if you keep enhancing your out standings, month on month, it may affect your CIBI Score, even if you are paying your minimum payment due.
Let us say in Jan you had an outstanding of Rs 10,000 and by Sept it has moved to Rs 1.25 lakhs, there is a high possibility that your credit score could take a beating. To what extent is difficult to say.
What happens here is that your credit utilization increases and any case where the rating agencies see that happening, they tend to downgrade your ratings. By what notch is difficult to say.
An interesting analysis was done recently and according to the same, those who pay the minimum amount are likely to default in even making that payment in the months to come.
On the other hand, those who settle their entire amounts they are less likely to default in making payments in the near future.
The one problem with defaulting on credit cards or paying just 10 per cent of the outstanding is that they not only affect your credit score, but, the financial charges are very steep.
The sad aspect of CIBIL Score is that there can be no explanation of humanitarian grounds. For example a serious ailment or loss of job can be articulated to the credit institution,without any benefits.
Important to check credit history
It is also important to check your credit history at least 2 times every year. This will enable you know if there is any discrepancy in the reports. If there is one, you can either take it to up with the bank or the financial institution from which you borrowed money or directly with CIBIL, in case there has been co discrepancy in reporting.