It is no hidden fact
that a Credit Card Offers you
with the much-desired freedom of making purchases with credit that you can
conveniently pay at a later stage in time. While this is an excellent way of
spending on goods and services, sometimes, you may end up using an excessively
large chunk of your credit limit. Of course, most banks and lenders need you to
pay the minimum balance, and offer convenient repayment alternatives for the
remaining amount; this high balance will still have an adverse impact on your
credit score.
To understand this
better, let us first throw some light on credit scores. To begin with, a credit score can be considered as a
numeric grade which indicates your financial discipline at any given point in
time. This grade is based on numerous factors including but not limited to:
•
Payment
History
•
Account
Balance
•
Credit
Limit
•
Age
of Credit History
Each of the
above-mentioned criteria has some weight in the determination of the credit
score. Of these, your level of debt accounts for 30% of the credit score, while
your payment history accounts for 30%. Considering the impact of these factors,
it is only justified that you try and maintain a reasonable level of debt, and
ensure an efficient payment routine, without any defaults.
Unfortunately, this
isn’t the only way your credit history takes a hit when you have an excessive
balance on your card. In fact, there are numerous other ill-effects of having a
high credit balance, the most notable of which are listed below:
1.
Higher the Credit Utilisation Ratio (CUR), lower your credit score.
If your Credit Card is maxed out that is your balance is nearing or
equal to your credit limit, it may result in a steep drop in your credit score
by as much as 10-45 points. Hence, you should ensure that you limit your
spending to 30% of your credit limit. For instance, if your credit limit is Rs.
1 Lakh, you should try not to exceed the expenditure beyond Rs. 30,000 in any
given month.
2.
High balance reduces your chances to qualify for thefurther credit.
Almost every bank or
lender considers your existing Credit Card debt as well as your payment
history, before issuing a new Credit Card, or approving a new loan. In case you
have more than one or two high balances under your name, it will reflect poorly
on your financial discipline, and put a question on your ability to repay the
credit, thus discouraging the bank from offering you any further loans. It is,
therefore, highly recommended for you to maintain a low balance to prove yourself
as a responsible borrower.
3.
Excessive balances prove to be highly expensive.
The balance on your
credit accrues interest. Hence, your monthly credit bill comprises of both -
the balance, as well as the interest on the balance. As must be evident, a high
balance will attract a high interest, often costing you thousands of rupees a
year. This is especially the case if you only manage to make the minimum
payments and procrastinate the actual payments. To avoid getting trapped in the
mounting interests, it is better to pay off your balance at the earliest
possible.
4.
A high balance will lead to higher minimum payments
The minimum payment on
your Credit Card bill usually ranges between 2-3% of the card balance. Hence,
for a balance of Rs. 10,000 your minimum amount will be around Rs. 200-300.
However, for a balance of Rs. 1 Lakh you will be required to pay Rs.
2,000-3,000 as the minimum payment, thereby increasing your financial burden.
The best way out in this scenario is to try and pay more than the minimum
amount and keep your balance as low as possible.
5.
Your available credit is low
More often than not,
activities like booking a hotel require a Credit Card, wherein the
establishment will likely authorise a
portion of your available funds. A high balance will leave you with low credit,
thus creating troubles in such bookings. In such a case, you will either have
to cancel your plans or use another card, both of which will because of your
inconvenience. The best way to avert this uncalled situation is to ensure a low balance.
Yes, it is ideal to
keep your Credit Card balance to the minimum. However, this doesn’t imply that
you cannot make large purchases using your card. In fact, doing so will help
you win reward points, and attract many other benefits. Whenever is it that you
make a significant purchase through your card simply pay off the balance as
soon as possible, without letting it linger for too long! A great way to do so
is by increasing your monthly payment.
Again, not using your
card at all isn’t ideal. To keep your credit score high, it is advisable that
you use your card, at least once a month and pay the bill timely.
We hope that you are
now better informed about Credit Card balance, and its impact on your credit
score. So, don’t wait any longer, before browsing the internet for the BestCredit Cards Online in India!
To apply online for
Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com,
the leading online lending marketplace that offers financial products from 70+
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