Does Paying Interest Affect Your Credit Score

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If we have to define a credit score, we would say it is a three-digit figure between 300 and 900 that denotes your creditworthiness in the UAE. The higher the credit score is, the fitter you are for a debt or a loan. Therefore, it is quite natural that you would like to boost your credit score to apply for suitable loan amounts. 

Credit score is used as the determinant factor by financial institutions to assess credit risk. If you have a healthy credit score, it is expected that you will be able to repay the loan without faltering. The idea that carrying a regular credit card balance rather than paying off your amount in full boosts your score is a common misconception regarding raising credit scores. That is false. Additionally, keeping balances on your credit card accounts often results in higher interest expenses for you, and in certain cases, it may even lower your credit score. 

The Policybazaar UAE official website is the most reliable place to learn about good credit scores and interest rates in the UAE and related information.  

How carrying a balance affects your credit score?

In the UAE, a credit score of around 700 is regarded as healthy and creditworthy. At times, misconceptions and wrong practices lead to the deterioration of your credit score. For instance, carrying a balance on your credit card is not a good practice to increase your credit score which many of us have believed erstwhile to be beneficial. 

If you are looking for a concrete answer to how paying interest affects credit score, please read through the article. Do you know that almost 35% of your credit score is calculated based on timely payment? If you delay the payment to incur interest, it will ultimately affect your credit score.  

The outstanding balance on your credit card always harms your credit score. Therefore, if you are thinking of delaying the repayment to increase your credit score, it will harm you in reality. Moreover, the interest you pay on your credit card is not considered a constituent factor of the final credit score. So, if you ask us what is the best practice, we would say pay off your outstanding balance in full each month. 

Thus, the simplest strategy to raise your credit score is to avoid making late payments. Following are some pointers for the same:

  • You can choose automated bill payments so that they are made on time and without any failure
  • You may keep track of the dates for paying your payment by setting up due-date alerts
  • To keep track of monthly spending, you can set up either a paper filing system or a digital filing system 

Pay your credit card balance in full

By now, you have understood how credit score interest rate works. Paying interest on your outstanding credit balance is something you should avoid by all means. Make a full payment every month to lower the risks related to your creditworthiness. Here are some benefits of the practice. 

Avoid incurring interest rates

When you fail to pay the full monthly amount within the billing cycle, the outstanding balance is carried forward to the next cycle. This incurs a certain amount of interest rate that you could have avoided by paying off the entire payable amount. Moreover, creditors will think twice if you have a record of multiple delays. The amount you are paying as interest could also be used for something significant. You are not only paying unnecessary credit interests but also lowering your credit score in the process.    

Maintain the repayment tenure

Your credit score depends on your adherence to the clauses. The repayment tenure is a major factor of the clause. If you delay payments, it will affect your predetermined period of payment. This in turn will badly affect your credit score. 

Do not purchase with an outstanding credit balance

We understand that one may suffer unexpected financial crunches that do not let them pay their billed amount in full. However, if you are unable to pay the monthly amount in full and on top of it using your credit card to purchase another item, it will drastically reduce your creditworthiness. This is regarded as a dangerous tendency and please avoid it always.  

Boost your monthly credit score

As it is said, drops of water make a sea. Your monthly credit score is the key constituent element of your final credit score. Thus, if you pay the credit balance in full every month, it increases your monthly credit score. Maintaining a healthy monthly credit score helps you earn a good overall credit score.   

What to do if you need to carry a balance?

When do we apply for a loan? We apply for a loan when the payment is huge that can’t be covered with a single cash payment. So, it is quite understandable that you will rely on loans for big purchases like house financing or buying a car. 

Now, if you do not pay the monthly balance in full, interest will be incurred. If the loan amount is bigger, you will have to bear a large amount as interest. However, if you keep a large amount for a prolonged period, interest charges can quickly add up, particularly if you're just making the minimum payment due each month. In some cases, accruing interest might lower your credit scores even if you don't make any more expenditures by increasing your balances and utilization rate.

So, if you see that interest is piling up, you must take action quickly. Here are a few solutions to tackle such tricky situations. 

  • Transfer the outstanding credit balance: You can transfer the balance to another credit card with a lower rate of interest. You can also opt for a longer repayment tenure with the new card
  • Apply for a debt consolidation loan: You can prevent excessive credit card balances and reduce utilization rates by paying off high-interest card balances with an instalment loan that has a fixed monthly payment and a relatively low-interest rate.
  • Contact credit card issuer: In case you are unable to pay the monthly balance due to an overwhelming financial crunch, you can always reach out to the credit card issuer. The management will go through your present condition and make adjustments if possible. However, do not keep faltering for months and let interests pile up to reduce your credit score. 

Policybazaar UAE is the only official website that offers a free credit score to users. Earning a credit score is a chargeable service that we do completely free of cost. You can visit our website for the latest news on credit scores and interest rates in the UAE. We have a list of the best credit card service providers on our website. You can browse through the list and buy your credit card through the Policybazaar UAE website. All these exciting services are only a few clicks away! Log on today to our website to unlock more rewards like free credit scores.   

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