I am making early payment of my debts. Will it affect my credit score. Please provide some clarity.
Yes, when you pay off a loan early, it has a significant impact on your credit score. Although there are several positive impacts, you can face a few marginal negative impacts.
First, let me explain the positive effects! By paying off a loan early, you
- Lower Your Credit Utilisation
By prepaying, you reduce your outstanding loan balance, which lowers your credit utilisation ratio. A lower ratio signals you are a responsible credit user, which improves your credit score.
- Decrease Your Debt Burden
If you clear your loan early, you reduce your overall debt load. It not only improves your debt-to-income ratio but also your credit score.
- Shows Financial Responsibility
Paying off a loan before its stipulated timeframe shows you are a financially prudent candidate. It enhances your creditworthiness in the eyes of the lenders and has a positive impact on your credit score.
Now, let me explain the negative impacts of making early loan repayment as well. Repaying a loan early might feel rewarding, but it quietly cuts short the span of regular repayments. A shorter trail of EMIs means fewer signals of discipline, limiting how much your credit score can actually benefit.
However, you can choose to make partial payments towards the loan amount, which affects your credit score to a minimum.