How Does Outstanding Debt Affect Your Credit Score?

Updated on: 12 Aug 2025

Outstanding debt is a crucial factor in determining your creditworthiness. As your debt piles up, availing of new loans or credit cards becomes difficult. When a financial institution receives your credit application, it reviews your credit report.

This document includes a record of your credit history as well as defaults. As such, any unpaid debts can substantially affect your score. Read on to better understand the meaning of outstanding debt, how it affects your credit score and more.

What is Outstanding Debt?

It refers to the amount accumulated in unpaid credit card bills and or loans that you have not yet repaid or cleared in full.

This is the total amount you have to pay to your bank or issuer, including the interest rate, late payment penalties and other charges
In credit cards, any amount carried over from the previous billing cycle is outstanding debt
For loans, it refers to the amount you need to repay to close the account, which includes any unpaid EMIs
In both cases, you need to pay the complete amount to become debt-free

How it Affects Your Credit Score

Any unpaid credit in your name counts towards your obligation. Thus, it impacts your credit score as it plays in part in how easily you can repay any new loan you apply for. See the two ways in which this affects your credit score:

Credit Utilisation Ratio

This factor plays a significant role in a lender’s assessment due to the following reasons:

It is defined as the ratio of total credit available and the total utilised credit
Most financial institutions prefer if you have a credit utilisation below 30%
Utilising over 30% of your credit limit on a card shows dependence on external financing and reflects negatively on your credit profile

In case of outstanding debt on credit cards, you can lower your utilisation ratio by using your card judiciously and paying your bill in total.

Also Read: How Credit Card Limit Is Calculated

Debt-to-Income Ratio

This is another key factor affecting your credit score due to the following reasons:

It determines how much of your monthly income goes towards paying debts
This helps lenders analyse the risk of offering you new credit
For instance, if you have a monthly income of Rs.25,000 and have a monthly repayment of Rs.10,000, your DTI is high
A high ratio suggests that you rely on debt to manage your finances or don’t have sufficient income to repay a new loan
This leads to a drop in credit score and lenders consider you to have a high risk of default

To improve credit score, you will need to repay your loan in full.

How to Manage Debt Smartly

To maintain a good credit score and reduce outstanding debt on credit cards and loans, follow these tips.

Keep track of your bill and EMI due dates and pay them on time
Set up reminders to ensure you don’t miss the due dates
Set up auto payments or pay the dues as soon as you have the funds available
Reevaluate your budget to prioritise repayment
Pay not just the minimum due amount on the credit card but the full amount due
Be more responsible with your credit card usage and be wary of its credit limit
Increase your income if you can and redirect it towards repayment first
Opt for a longer tenure on your loan to make EMIs more affordable
If you have multiple loans, consider debt consolidation
Pay more than the EMI to lower your interest liability and close your loan early
Avoid applying for a new loan until the existing debt is cleared

FAQs on the Effect of Outstanding Debt on Credit Score

How many points does your credit score go up after paying off debt?

Paying your debt on time can increase your score by up to 200 points in just 30 days. However, it depends on how much debt you have accumulated over time and how old the defaults are.

Why debt affects credit score the most?

Payment history accounts for 35% of your credit score. So, late payment of EMIs or credit card bills can affect your credit card history to a high extent.

Does paying off debt improve your credit score?

Yes, paying off your debt can increase your credit score over time. However, it depends on the loan amount and your income. It also depends on whether you have frequently paid your EMIs late.