Being In Debt Could Be 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 rate the loan should be disbursed. In order to do so, lenders will access your CIBIL report and score, and assess your creditworthiness. While a good credit score is your doorway to loans at cheaper interest rates, poor credit score may result into rejections or loans at expensive rates.

In order to maintain a good credit score, you first need to figure out how you can achieve it and what could get you rewarded.

Debt is not a bad thing
Even in these days when everything is available on credit, some Indians think that being in any kind of debt may spell financial doom. Well, that is not true and having no debt or just holding a single kind of debt does not fetch you 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 a 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, when you have a bit of extra cash, your score will move up.

Voluntary debt may spell trouble
The only debt element that usually lands people into trouble is voluntary debt or credit cards. There is no denying that they are supremely convenient, but if you do not use them judiciously, these can land you in the soup. Your credit score is impacted negatively if you do not make timely repayments in full on your card/s or if you are perilously close to the full utilisation of credit limit. Late payments can shave off a lion’s share of your credit score. Also, 30% of your credit score is determined by the kind of debt you are servicing. 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 behaviour works against you
Just because you are spoilt for choice where credit is concerned, it does not mean you 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. If you have a good mix of debts and service them regularly, you can maintain a good credit score and stay loan-ready at all times.

About the author: Rajiv Raj is the director and co-founder of www.creditvidya.com.