Does Making Minimum Credit Card Payments Affect Credit Score

Credit information companies assign a credit score to borrowers. The credit score is a three-digit number between 300 and 900 that indicates a borrower’s repayment capacity and creditworthiness.

TransUnion CIBIL is one of the most preferred credit information companies in India, and the credit rating or score it assigns to borrowers is known as the CIBIL score. A good CIBIL score range is anything between 750 and 900. Borrowers whose credit score lies in this range can avail of Home Loans at low interest rates and enjoy other beneficial loan terms, such as long repayment tenors and higher loan sanctions.

Credit information agencies decide a borrower’s credit score based on the information provided to them by lenders and financial institutions. If you are using a credit card, your credit card company will send information regarding your repayment habits to credit information agencies.

If you are someone who always pays EMIs on time and clears more than the minimum amount due, your credit score will automatically be in the good CIBIL score range. However, if you are someone who pays only the minimum amount due, you will have a low CIBIL score. In this article, we discuss how paying the minimum amount due affects your CIBIL score.

What is the Minimum Amount Due on a Credit Card?

The minimum amount due on a credit card is the smallest payment a cardholder must make by the due date to keep the account in good standing and avoid late fees. In India, this amount is typically calculated as a percentage of the total outstanding balance.

It is important to note that while paying the minimum amount due prevents late fees and keeps the account active, the remaining unpaid balance will accrue interest. Over time, this can lead to a significant increase in the total amount owed, as interest charges accumulate on the outstanding balance. Therefore, it is advisable to pay more than the minimum amount due whenever possible to reduce the principal balance faster and minimise interest charges.

Impact of Minimum Credit Card Payments on Your Credit Score 

Credit information agencies assign credit scores to borrowers based on several different factors, and one of these factors is the credit utilisation ratio. The credit utilisation ratio is the percentage of credit being used from the total credit available to the borrower. This ratio is important as it helps a lender understand how dependent you are on credit. Here’s how credit utilisation affects your credit score: 

• Borrowers who have a high credit utilisation ratio are borrowers who are highly dependent on credit. Such borrowers are considered risky clients by lenders and, therefore, lenders may not approve loan applications from such borrowers. Borrowers who have a low credit utilisation ratio, on the other hand, may receive quick approval on their loan applications.
• When a borrower pays the minimum amount due on their credit cards consistently, their credit score is not affected. However, when a borrower pays the minimum amount due for a prolonged period and then misses a credit card payment, their credit utilisation ratio increases. The same happens when a borrower keeps paying the minimum amount due on their credit card and using their credit card to take care of various expenses. When a borrower’s credit utilisation ratio increases, their credit score goes down.

Therefore, borrowers are advised to use their credit cards cautiously and try to clear the entire amount due on their credit cards each month and not just the minimum amount due. Borrowers are also advised not to make big purchases on their credit cards if they are unable to clear the entire amount due before the next billing cycle.  

Read Also: Know What CIBIL Score is Considered Good for a Home Loan

How to Improve Your Credit Score?

If you want to avail of a favourable loan deal, make sure you have a good CIBIL score that is anything above 750. If your credit report shows that you do not have the required CIBIL score, here’s what you can do to improve your credit rating and your chances of loan approval: 

• To start with, maintain a clear repayment record by paying all your credit card bills and loan EMIs on time. Your credit repayment history makes up 35% of your CIBIL score, and therefore, it is necessary to maintain a clean repayment track.  
• Get in the habit of clearing the entire amount due on all your credit cards and not just the minimum amount due. If you think you will not be able to clear the entire amount due, postpone the expense. 
• Apply for credit only when you need it. Too many credit card and loan applications lead to a borrower having too many hard enquiries, which, in turn, leads to borrowers having a low CIBIL score. So, refrain from applying for too many loans and credit cards in general.   
• Lastly, check your credit report for errors from time to time. Sometimes, incorrect information may get passed to the credit information agencies, which can lead to borrowers having a low CIBIL score. Borrowers should check their CIBIL score from time to time and make sure there are no errors in their credit reports. 

When it comes to loans of any type, the importance of the CIBIL score cannot be undermined. If you are planning to apply for a loan of any type, make sure you have a good CIBIL score, that is, anything above 750. Having such a credit score will not only help you get quick approval but also avail of a loan on highly lucrative loan terms and conditions.   

Conclusion

A good CIBIL score plays a key role in securing loans on favourable terms. While paying the minimum amount due on a credit card helps avoid late fees, it can lead to increased credit utilisation, higher interest costs, and a declining credit score over time. Borrowers should aim to clear their total outstanding balance each month and use credit responsibly to maintain financial health.

Regularly checking credit reports for errors and maintaining a disciplined repayment history can significantly improve creditworthiness, ensuring easier access to loans with better interest rates and repayment options.