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Is having debt good for your credit score?

By Rajiv Raj
February 05, 2015 09:55 IST
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In order to be eligible for a loan when you really need one, it is imperative to maintain a good credit score. By having a good mix of debt and servicing it regularly, you can maintain a good credit score and be loan ready at all times.

Illustration: Uttam Ghosh/

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 rates should the loan be disbursed to you. Lenders access your CIBIL report and score to assess your creditworthiness. While a good credit score is your doorway to loans at cheaper rates of interest, poor credit scores on the other hand may mean rejection or loans at expensive rates.

In order to maintain a good credit score, you first need to figure out what is it that helps building a good credit score, and what you may be rewarded for.

Debt is not a bad thing

Even in this day and age, where almost everything is available on credit, some Indians think that having any kind of debt may spell financial doom for them. Well, that is not true, and having no debt or having a single kind of debt does not fetch you a 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 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 expensive loans, such as personal loans or student loans, if you have a bit of extra cash in hand, your score will move up.

Voluntary debt may spell trouble

The only debt that gets people into trouble is the element of voluntary debt or credit card debt. There is no denying that they are supremely convenient, but if you do not use such debt judiciously it can land you in a soup. Your credit score is impacted negatively if you do not make timely repayments in full on your card or are perilously close to the utilisation of credit limit.

Late payments can shave-off a lion’s share of your credit score. 30 per cent of your credit score is determined by the kind of debt you are servicing and 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, does not mean you will 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.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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Rajiv Raj