The topic that we have here for discussion may seem to be a self-defeating one as without debt there can be no credit score and then we say debt can ruin your credit, how is that possible? The catch word here is "can" and not "will". So as we know in life excess of anything is bad the same applies to debt too, while debt in moderation can be a good thing for your credit, too much of it or overdependence on debt can cause trouble for you. Let's see how?
Below we discuss how debt can sometimes be the cause of ruined credit. Though it is important to mention and also remember that debt is not a bad word and all debt is not bad and nor does it cause any problems generally.
Most problems start when there is too much debt and handling it becomes difficult. Though lenders do look at the debt to income ratio when they sanction loan, the borrower also needs to exercise caution and use common sense when they apply for loans and even after that. A ratio of debt to income ratio of less than 40% is considered optimal. Whenever you apply for any loan, factor in the increased outflow that may happen over the next few months apart from the increased EMI burden, also keep in mind if you expect some big ticket tickets expenditures in near future or a fall in your income for some reason then you should be cautious before you apply for any more credit.
There are loans and there is rolling credit in the form of credit card expenditure. Both are a part of your credit report and both qualify as debt. Credit card spending can easily go out of hand if you are not careful, while a loan is taken one time after the lender factors in various aspects, credit card spending is more of a regular temptation. The card companies allow the customers to pay only a minimum amount and carry over the remaining debt to the next month, this may sound like a good way out when one is faced with a liquidity crunch but this opens the doorway to a debt trap. Over dependence on credit cards can also cause the credit utilization ratio to be high which can result in low CIBIL score. When using credit cards stay away from the temptation to splurge, avoid carrying over the balances to the next cycles and also don't spend more than 30% of the sanctioned credit limit.
Not debt, but your attitude towards it also determines how good or bad your credit will be. Being an irresponsible borrower can ruin your credit! If you have multiple loans and credit cards yet you always pay your dues on time and in full then there would be no problem as you are establishing yourself as a responsible borrower. However, if you have a single loan or a credit card yet you are frequently late in making your payments or miss them, then despite having less debt, you will end up having a low score. Being regular in your payments is the best way to improve credit score if it is low and maintains a healthy credit trail as repayment history is the biggest component when the credit scores are calculated.
Thus it is evident from the above discussion that debt per se will not ruin your credit. This may happen if you are not regular in your payments which will make you a defaulter, or are too dependent on your credit card/s which will the push the credit utilization ratio high or if you have too much debt which could make it difficult for you to service your debt and may make you fall into a debt trap.