A concerned credit card holder carrying ₹60,000 in outstanding debt has raised important questions about how this balance might impact their creditworthiness and whether taking a personal loan to clear the amount could help or harm their financial profile.
Understanding Credit Utilization Impact
The individual originally had a credit card bill of ₹1 lakh and has successfully paid back ₹40,000 over two months, leaving ₹60,000 outstanding. This remaining balance could indeed affect their credit score, primarily through the credit utilization ratio (CUR).
If the credit limit is approximately ₹1 lakh, the current utilization stands at around 60%, which exceeds the preferred threshold of 30-40% that lenders typically favor. High credit utilization signals potential financial stress and heavy reliance on borrowed funds, which can negatively impact credit scores over time.
Repayment Behavior Matters Equally
Beyond the utilization percentage, repayment patterns play a crucial role in determining credit health. Making regular substantial payments rather than just minimum dues demonstrates financial discipline and can mitigate negative scoring impacts.
Missing payments or consistently paying only the minimum amount due gets reported to credit bureaus and can significantly damage credit scores. Repeated payment delays are particularly harmful and may remain on credit reports for years, affecting future loan eligibility and potentially leading to higher interest rates.
Personal Loan Solution: Pros and Cons
Considering a personal loan to clear the credit card debt presents both advantages and potential drawbacks that require careful evaluation.
The benefits include dramatically reducing credit utilization, which typically boosts credit scores. Replacing high-cost revolving credit with a structured EMI plan having fixed tenure demonstrates repayment discipline and can strengthen long-term credit behavior.
However, applying for a personal loan triggers a hard inquiry on your credit report, causing a temporary score dip. More importantly, the debt doesn't disappear but merely shifts to a different product. Missing EMIs on the personal loan could severely damage your credit score and future borrowing capacity.
The key to maintaining healthy credit lies in keeping utilization low, making all payments on time, and avoiding unnecessary additional credit. If a personal loan helps achieve lower utilization and supports consistent EMI payments, it could potentially improve your credit score while building stronger financial habits.
Financial experts emphasize that consistent repayment behavior and maintaining credit utilization below 30% are fundamental to preserving and improving credit health over time.
