There are lots of ways in which credit cards make our lives easier. However, the task of repayment is certainly not the most enjoyable for many customers. Depending on the number oftenures and instalments, we have to make a certain payment every month. Fortunately, credit card providers offer some flexibility through the minimum amount due.

However, many users are left with multiple questions about credit and CIBIL score like can making minimum payments affect credit score and what are the CIBIL score factors. To know the answer to this question, we first need to understand the concept of credit score and minimum payable amount. Let's dive in.

Making Minumum Payments Affects Credit Score: What Do You Mean by Credit Score? A credit score is necessary before applying for a loan or credit card. It is an indicator of a person's ability to repay debt. Basically, banks assess an individual's credit score before lending them the money. In India, it is a three-digit number which lies between 300 and 900. Needless to say, the higher the score, the better the chances of getting the loan approved.

In India, the credit score is determined by Credit Information Bureau (India) Limited, Highmark, Equifax, and Experian. Out of these, the most popular one is the CIBIL. You can also check your credit score on ZetApp. Generally, a credit score of about 750 is considered excellent. But how to improve your credit score? Is there any way? The answer is a resounding yes!

Making Minimum Payments Affects Credit Score: What Are the Credit Score Factors

Before knowing does making minimum payments affect your credit score, know the factors affecting the CIBIL score:

1. Payment History- Your previous payment history bears the biggest influence on your credit score. This paints a picture of whether you are someone who is used to paying bills on time. It has a weightage of approximately 35% on the credit score. Paying late can negatively impact your CIBIL. Additionally, how late you are also matters in this case. Someone who was late by 90 days will be penalized more than someone who missed their due by 90 days. Public events like bankruptcy are also a big red flag for potential lenders. Also, the timing of missed payments is important as well. Someone who missed their payments a decade ago will be considered less risky than someone who did the same last year.

2. Credit Utilization Ratio- This is your debt ratio to the available credit limit. If your current credit limit is high, the chances of you getting a loan are lower. For example, consider a person “A” has a credit limit of ₹2000 and a debt of ₹1500. Consider a person “B” with a credit limit of ₹1500 without any debt. The lenders would prefer to sanction a loan for B since they believe that he will be more capable of managing the loan. This is the concept of credit utilization. This is a rare situation where less is better!

3. Length of Credit- The longer you have been using a credit card, the better. Factors like the age of your oldest account and the average age of all your accounts have a bearing here. To keep it simple, having a long credit history is useful more often than not. We recommend leaving your credit accounts open even if you last used them a while ago.

4. New Credit- It is the number of new accounts that you have opened that goes on to have a bearing on your credit score. Most lenders usually make a hard inquiry when one applies for a new credit card or even a loan. Basically, they are requesting your existing credit report to verify your repaying capability. Hard Inquiry usually causes a small and temporary decrease in your CIBIL score.

5. Types of Credit- A small component of your credit score is the variation in the types of credits that you have. It is better if you have a mix of different types of credit, like loans, mortgages, and credit cards.

Making Minimum Payments Affects Credit Score: How is Credit Score Calculated in India?

You might know how to check your credit score for free. However, do you know how it is calculated? In India, most of the time, by credit score, people usually mean the CIBIL score. To calculate the CIBIL score online, follow the below steps.

1. Go to the CIBIL website.

2. In the form given, fill out your personal details like name, contact number, e-mail and more.

3. Now, you need to give some additional details like your PAN Card. It is very important that you enter the PAN Card details correctly.

4. Next, answer all the questions regarding your previous loans and credit cards. Based on the information provided, your CIBIL score will be calculated, and a comprehensive credit report will be generated.

Now, if you want to avoid calculating your CIBIL score, you can download the ZetApp application, provide your personal details, and check your score.

Read More: How to Choose the Right Credit Card for Your Lifestyle in India?

Making Minimum Payments Affects Credit Score: How to Build a Credit Score?

Not satisfied with your current credit score? Fortunately, there are some practical ways to improve your credit score quickly:

1. Setting up auto pay using the autopay mechanism is a great way to ensure that you make the repayments on time. If you pay your bills on time, then you are bound to see a rise in your score.

2. Keep credit utilization below 30%- Ideally, a credit utilization ratio below 30% is considered good. A higher credit balance usually gives off the impression that the borrower likes to overspend and has issues managing his expenses.

3. Prioritize your oldest credit cards- A mistake many people make is that they usually close their oldest credit cards as they add up their credit card collection. This is a tactic that will significantly impact your credit score. On the alternative, it is best that you use your oldest card at least once in a few months.

4. Keep an eye out for your credit report-Sometimes; the credit report might have inaccurate information. If it's a case of identity theft, then you could have multiple derogatory marks on your account. Hence, with most credit agencies, you have the right to dispute information that you feel is inaccurate.

5. Authorized user- If you have newly obtained a credit card, then a simple tip to boost your credit score is to have someone add you as an authorized user. The said person could be part of your family or a friend. But do keep in mind that your overall profile is equally important.

Making Minimum Payments Affects Credit Score: What Exactly is the Minimum Amount Due on a Credit Card?

Credit cards offer a bit of flexibility with regard to repayment. In addition to the total amount payable, there is a provision called the minimum amount. The total amount is the sum of all expenses in the current billing cycle. On the other hand, the minimum amount is the smallest payment that will be accepted toward your debt.

Read More: Best HDFC Credit Cards for 2023: Key Features & Benefits

Does Making Minimum Payments Affect Your Credit Score?

The reason why many people opt to pay the minimum amount is that you can avoid a late payment penalty through this method. The interest will then be calculated only on the remaining balance. However, if you are someone who keeps resorting to this method, then your credit utilization will see an increase, adversely impacting your credit score.

A credit utilization ratio of over 30 per cent usually has negative implications on your credit score. Thus, even if you are forced into a situation where you can only pay the minimum amount, ensure that your credit utilization ratio does not exceed the 30% mark.

Consider an example to see the impact of minimum payments on your credit. Suppose you have a credit balance of ₹50000 with 18% interest. If you opt to pay the minimum amount (in this case, ₹2500), it would take around 7 years to repay the entire amount. Also, the total interest amount would be in excess of ₹34000. The longer the time it takes to repay debt, the higher the interest accrued will be.

How Does Making the Minimum Payments Impact Your Credit Score?

Repayment History

Repayment history has a huge bearing on the credit score. Consistently making the minimum payment will not improve your credit score. Although you are clearing your financial obligations, this is the cold, hard truth. On the flip side, ensuring that you are able to pay off the minimum amount due means that your credit score won't dip any further.

Read More: How Credit Card Usage Makes or Breaks Your Credit Score?

Credit Utilisation Rate

In simple terms, credit utilization refers to the percentage of available credit that you are using. Hence, if you regularly use a credit card and have a high utilization rate, then making the minimum payment might not be a good idea. In fact, the process will eventually increase your credit utilization.

For example, if you have a credit limit of 10000 and a balance of 8000, your credit utilization stands at 80%. In such a situation, if you insist on taking the minimum payment route, then the utilization rate will not drop down, eventually impacting your credit score.

Why Should You Avoid Making Minimum Payments?

Now you have a fair idea of the impact of minimum payment on credit score. Unfortunately, your credit score is not the only factor that will be negatively impacted by making minimum payments.

1. More Interest- Choosing to pay the minimum due amount means that you are trapped in the debt cycle for a longer period. This means that the users will have to pay more interest compared to someone who pays the actual instalments.

2. Longer debt Burden- Paying the minimum amount will keep you in the debt cycle for longer. Besides the interest payments and constraints on financial products, their mental impact should also be considered.

3. Impact on Future Credit Applications- A person who consistently makes minimum payments may be considered a high-risk borrower. This negatively impacts your chances of getting credit in the future. This is because lenders prefer users who pay off their dues in full.

Wrap up

So, now you have an idea of your question, can making minimum payments affect credit score? Moreover, you ought to have gotten an idea of why making the minimum payments is not necessarily the best possible strategy to boost your credit score. If you have any further queries on how to build a credit score, do reach out to us.

Read More: How to Improve your CIBIL Score after Loan Settlement

FAQs

Will bankruptcy affects my credit score?

Ans. Bankruptcy could significantly damage your credit score. There are no two ways about it. In fact, it can be seen on your credit report for around 10 years. Hence, managing your finances carefully is better than jumping into such a situation.

What is the lowest score for getting a credit card?

Ans. There is no fixed credit score required to qualify for a credit card. Different cards have different requirements. However, if you are seeking a premium credit card, then having a credit score in excess of 700 will serve you well.

Is it possible to get loans with lower credit scores?

Ans. Although not as straightforward, it is certainly possible to get loans without impressive credit scores. In fact, there are lenders that specialize in providing loans for users with low credit scores. The catch here is in unfavourable conditions. Usually, higher interest rates are charged.

How can I improve my credit score fast?

Ans. If you are positively working to improve your credit situation, then slowly but steadily, your score is bound to see an increase. However, the time taken will vary from individual to individual, depending on their credit situation.

Will checking my credit score lower it?

Ans. Checking your credit score through ZetApp will not affect your credit score. As a matter of fact, we recommend that you check your score at least once a year. On the flip side, hard inquiries might have a negative impact on your credit score.

What is the formula for credit score calculation?

Ans. The formula of CIBIL is as follows: Credit score= (Payment History * Weight) + (Credit Utilization * Weight) + (Length of Credit History * Weight) + (New Credit * Weight) + (Types of Credit * Weight).