Monday, August 27, 2018

Why is Excessive Credit Card Balance Injurious to Your Credit Report?

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!

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Author: verified_user