How can Credit Card Debts Hurt your Credit Score?
Jul 20, 2021 10:49 AM EDT
If you are on this page, then it is likely that you know the significance and impact of debts or, to be more precise, the credit card debts in your credit score. It indicates that you need to regularly follow up with your obligations to maintain a balanced financial profile in life.
We know that credit card debts or any debts limit the spending capacity and availing benefits of the person. It has a significant and straightforward influence on your credit score. This, in turn, restricts your ability and options to take out any other loans and get lower EMIs.
To simply put it, the debt amount affects the credit score of the person in question. And if you are wondering how your credit score gets impacted, let me tell you. The bank calculates your credit score by finding the ratio between your credit card limit and the credit card balance and how much you are over-utilizing your credit benefit. The damage to your credit score is relative to the margin of your credit card balance.
Although a high credit card outstanding amount harms the credit score, the worst-case scenario is when you max out or surpass the limit of your credit card balance. When the credit score is calculated, it also accounts for the closeness of the outstanding loan balance with the original loan amount. So, to maintain a positive and high credit score, it is beneficial that you pay up your loan balances on time.
For example, if you are taking some kind of personal loan, then make sure that you apply only for that loan amount that you can afford to repay during the tenure of the term. You should also check the interest rates and EMIs for further convenience. If you cannot pay back the EMIs and the principal amount within the set tenure, the outstanding loan balance will negatively impact your overall credit score. That is to say, even if you miss a single EMI or are late in paying up, still the effect will harm the credit score.
If your debt and repayment history is good, you can get a credit score between 300 and 900. The higher the number, the better is the credit score. A high credit score impacts your reputation in front of lenders. It can enable you to get big loans at minimum interest rates.
That being said, exactly how is the credit score affected by the credit card debt.
● As per statics, 30% of the credit score depends on the debt amount. So, a large debt amount will instantly lower your credit score and eliminate your chances of getting any instant personal loan.
● If you ever defaulted in loan repayments or have late EMI payments, the result can be seen in the credit score.
● Another factor that has a high impact on the credit score is credit utilization. Suppose your credit utilization is high, or to be precise, more than 30% of the credit card balance. In that case, you should probably stop using your credit card for the time being till the outstanding amount is paid.
● After all this, you might think that having no debt is better than having debts. But, that's not the case. Suppose you have no history of previous debts. In that case, the loan provider cannot see your efficiency and would not approve you of any loan.
● Another misconception that many credit card holders have is that credit card settlement favors the credit score. This settlement is a cheap way to repay your creditors. However, it still has a negative impact on the credit score.
Now that we have learned how credit card debt can harm the credit score let's see what steps one can take to prevent a bad credit score. If you have high credit card debt, make sure that you follow the solution given below.
How to prevent harming your credit score from credit card debt?
The quickest and safe-proof option to pay off your credit card debts is by taking a credit card debt consolidation loan. It is also known as credit card refinance for personal loans. This personal loan solution allows you to repay your credit card debts at once. Then you can gradually repay the refinance amount in installments.
So, get the best credit card refinance loan today itself to get rid of your credit card debts. If the loan amount and interest charges are high, you can go for a personal refinance loan with a low APR (Annual Percentage Rate). Eventually, your credit utilization rate will decrease and improve your credit score.
When you apply for the personal credit card refinance loan and get approval, the lenders will immediately pay off all your debts at once. Now, the only obligation you have to worry about is the repayment of refinance loan. So, it is less pressurizing. You repay the loan amount in monthly installments with a low-interest rate. When the personal refinances loan is fully refunded, all your credit lines will be closed.
Nonetheless, you have to patient as multiple factors boost the credit score even after the low credit utilization rate.
