Correlation between Credit Rating and Debt

Your credit rating and debt are directly related to each other. The amount of debt that you have and the way you handle and make payments affect your credit score. You need to understand the relationship between credit rating and debt and how they are linked together. In simple words, an individual can't have a credit rating until he/she has availed of any debt. So, they both share a unique relationship with each other, as one cannot exist without the other.

How debt affects your credit score?

Debt plays a big part in your financial life. Not only does it affect your spending ability, but it also has a direct impact on your credit score and a direct impact on your ability to borrow money. The amount of debt you have is one of the biggest factors that go into your credit score; your level of debt is 30% of your credit score. As a guideline, you should keep your credit card utilization at 30%. Having high balances on your credit card or too much debt can heavily affect your credit score. Your credit score starts improving quickly once you start paying down your outstanding debts.

How credit scores contribute to your debt potential?

Just like a debt impacts your credit score, it also affects your ability to get the debt. Every bank decides the creditworthiness of an individual based on their credit score, with good credit scores, you have the potential to get approved for any debt easily. On the other hand, if you have a bad credit score, your application would likely to be outrightly rejected. A good credit score can also help you get low-interest rates and access to the most rewarding credit cards in the market, including those that offer the lowest interest rates and the best rewards, such as cashback, travel points, and other benefits.

Tips to help you manage your debt and credit score

These following tips will help you to manage credit rating and debt effectively.

  1. Always pay outstanding dues on time:

    If you have availed of any debt such as credit card or any loan. It is very important to make their payments on time. It will boost your credit score, and it will also make it easier for you to get approved for any credit product easily in the future with benefits like low-interest rate and pre-approved offers on loans and credit cards.

  2. Pay more than the minimum payment on your credit card:

    If you pay only the minimum payment on your credit cards, it will take years to pay off the outstanding debt and that too at higher charges. So, it's better to pay off your credit card balances in full and on time each month to save your money.

  3. Watch your debt-to-income ratio:

    The debt-to-income (DTI) ratio is a personal finance measure that compares an individual's monthly debt payment to his or her monthly gross income. Knowing your debt-to-income ratio will help you determine if your debt could disqualify you from borrowing money in the future. Generally, banks prefer someone who has a low DTI before lending. A low DTI ratio demonstrates a good balance between debt and income. You can lower your debt-to-income ratio by reducing your monthly recurring debt or increasing your gross monthly income.

  4. Use a monthly budget to plan your expenses:

    Keeping a budget helps ensure you have enough money to cover your monthly expenses. You should always plan beforehand so that you can take early action if it looks like you won't have enough money to pay your bills this month or next. Having a budget will help you to plan and spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.

  5. Monitor your credit reports regularly:

    You should always review your credit reports regularly to make sure they are accurate, and to look for areas where you can improve. You can request for a free copy of your credit report from any of the credit bureaus i.e. CIBIL, Equifax and Experian. If you find any mistake in your credit report, you can contact them and get the mistake rectified. So, these were some of the tips that will help you to manage your credit and debt effectively. As a result, it will help you to boost your credit score in no time and thus making you eligible for low rate loans and credit cards in the future.