Impact of Paying Only Minimum Balance on CIBIL Score

The CIBIL score, also known as the Credit Information Bureau India Limited score, is a crucial metric that lenders and financial institutions use to assess a borrower's creditworthiness. Several factors, including dues and defaults, influence this score. In this article, we delve into the impact of paying only the minimum balance on your CIBIL score.

Understanding the Minimum Balance

When you pay only the minimum due amount on your credit card or loan, you are essentially compromising on the entire outstanding amount. As a result, your credit card or loan account is settled.

Settlement Status and Its Risks

A settlement status in any of your loan accounts can negatively impact your credit report. This is because it suggests that you are unable to pay the entire amount due on your debt. This can reduce your creditworthiness, making it more challenging to secure loans in the future. Therefore, if you can afford to pay the entire due amount, it is advisable to settle the account by paying the outstanding amount to maintain good credit health.

CIBIL Score Impact of Paying Minimum Balance

CIBIL uses both outstanding dues and defaults to compute your score. Paying only the minimum due amount can slightly impact your score, but the main issue arises from the increasing interest and the accumulation of outstanding debt over time. Let's break down the various impacts:

Impact of Outstanding Debt

When you pay only the minimum balance, the remaining amount serves as outstanding debt. Unlike a default, this does not significantly affect your CIBIL score. However, as the outstanding debt accumulates over time, your credit utilization rate increases, leading to a more substantial decrease in your CIBIL score.

Financially Advantages of Paying Minimum

While this can negatively affect your CIBIL score, there are financial benefits:

Profit for the Bank: If you have a credit card with a spending limit of 1 lac INR, and you are only paying the minimum balance, the bank can potentially earn around 2.7 k INR every month on the unpaid bill, assuming a 3% monthly interest rate. This amounts to a return on investment of 32.4%. Merchant Collaborations: In addition to the interest earned, banks often offer merchant collaborations and card charges, further increasing their profit.

It is essential to note that paying the minimum amount can lead to a higher credit utilization rate, which negatively impacts your overall credit score.

Credit Health and Financial Discipline

Even if paying the minimum balance has these advantages for the bank, it is crucial to prioritize good financial discipline and maintain a healthy credit profile. Always try to make timely payments to avoid negative impacts on your credit score.

Conclusion

In summary, while paying only the minimum balance may have limited or no drastic impact on your CIBIL score in the short term, the long-term consequences include increased credit utilization and lower credit scores. It is important to either avoid this practice or to be aware of the potential risks and plan accordingly to maintain a healthy credit profile.