Managing finances becomes complicated when debts start to amass, especially when one has credit cards that tend to have high interest rates. When this happens, some will settle their credit card by opting for a credit card settlement to relieve financial stress. However, after settling credit card dues, one wonders if they can obtain a loan in the future. Let’s discuss what credit card settlement is, how it affects your credit score, and what you can do to qualify for a loan after settlement.
What is Credit Card Settlement?
Credit card loan settlement is also available for people who cannot repay their credit card dues in whole. During the process of credit card settlement, you pay only part of your credit card balance to the bank and request the latter to forgive the rest. Therefore, it offers you some reprieve but not without costs; most significant of those is a lowering of the credit score.
- Partial Payment Agreement: You agree to pay a portion of the amount owed, which is usually between 40-60%.
- Finality of Debt: Once the settlement amount is paid, the bank will treat it as a closed account but may still appear on your credit report.
- Impact on Credit Even though the debt is settled, settlement may still have an adverse effect on your credit rating because it shows that you were unable to fulfill the full financial obligation.
How Does Credit Card Settlement Affect Your Credit Score?
When you settle a credit card, it directly shows on your credit score due to it being a potential form of risk in finance. Credit card settlement can stay active on the credit report of a client for up to 7 years, signalling that a client did not meet his or her stipulated repayments. Next, there is a closer look at how settlements affect one’s credit:
- Credit Score Reduction: Credit score declines depend on many factors, and in some cases, a significant reduction can occur-75 to 100 points-though this is generally tied to the existing score.
- ‘Settlement’ Status: The bank will label the account status “settlement” rather than “close” or “payment in full.” Such a note can be accessed by future lenders and thus affect their lending decision.
- Difficulty in obtaining credit: Some lenders may view settlements as a red flag, which can make getting approved for new credit, especially unsecured loans, more difficult in the short term.
Can You Get a Loan After Credit Card Settlement?
Yes, it is possible to take a loan after credit card settlement, though it may pose some problems depending on one’s credit profile and that of the lender’s in terms of risk appetite. Here’s how you may improve the chances:
- Credit Recovery: Work aggressively to improve your credit score after settlement by paying your bills on time and decreasing outstanding debt.
- Secured Loans: Some lenders will be more likely to provide a loan if it’s secured by collateral, such as a house or Vehicle, because this reduces their risk.
- Patience: You can rebuild your credit and improve the financial status of the clients by waiting 12 to 18 months before trying to get a new loan.
Types of Loans You May Qualify For After Settlement
After settling a credit card, it’s advisable knowing which types of loans to qualify for:
Secured Loans
The loan is secured with assets like property or savings, and this can make it more readily available after a credit settlement. Since these loans carry collateral, lenders may still be willing to extend credit even if an account on your report has been settled.
- Examples: Home loans, auto loans, or loans against fixed deposits.
- Interest Rates: Generally lower than unsecured loans, since the lender’s risk is reduced.
High-Interest Personal Loans
You might still receive an unsecured personal loan, but be prepared for higher rates of interest. Some loan lenders could offer personal loans for a greater rate to balance the threat that loaning carries afterward having settlement.
- Shorter Tenures: Such loans often carry a shorter tenor with a higher EMI.
- Eligibility: Each lender’s policy differs; some may overlook settlements if you’ve demonstrated improved financial behaviour.
Small Loans or Microfinance
Small personal loans or microloans, typically in smaller amounts, may be more accessible. Certain lenders specialise in smaller loans for individuals with limited credit history or lower scores.
- Flexibility: Amounts are generally lower, making approval slightly easier.
- These provide a better repayment term, commonly offered by NBFCs or digital lenders.
Alternatives to Traditional Loans Post-Settlement
If traditional loans are not easily available post-settlement, then look into the following alternatives in rebuilding credit and accessing funds:
Credit-Builder Loans
Some financial institutions offer credit-builder loans specifically designed to help people repair their credit. In this type of loan, instead of disbursing loan funds upfront, the bank deposits the money into a savings account, and you make monthly payments until it’s paid off.
- Credit Improvement: Payment activity is reported to credit bureaus, which helps you rebuild your credit score.
- Access to Funds: Once fully paid, funds become accessible.
Cosigner Loans
This improves the chances of approval because a co-signer loan assumes that the co-signer has a solid credit history. Do note that a missed payment would negatively impact the credit scores of both the applicant and the co-signer.
- Improved Terms: With a good co-signer, you can get some much better loan terms and interest rates.
- Mutual Responsibility: Make timely payments to avoid straining relationships with your co-signer.
Peer-to-Peer (P2P) Lending
Peer-to-peer lending sites are likely to have more lenient credit requirements. In these online platforms, the borrower is connected directly to individual investors who may be more willing to lend regardless of a credit settlement.
- Higher Interest Rates: P2P lenders may charge more interest to mitigate risk.
- Flexible Amount: The sizes and terms of loans are also variable so that one finds the perfect fit according to one’s needs.
Tips for Improving Your Loan Eligibility After Settlement
Improved after settlement, your financial profile can significantly affect loan eligibility. Here are some steps to make it happen:
Rebuild Your Credit
Rebuild your credit score by paying bills on time, minimizing the use of credit, and avoiding payments after due dates. A good payment history will help counterbalance the negative impact of settlement.
Reduce Your Debt-to-Income Ratio
The debt-to-income ratio measures your debt payments relative to income. Lowering your debt and increasing income can enhance your appeal to lenders.
Wait Before Applying
The longer you wait before applying for a loan, the more time your credit score has to recover. Take at least a year to demonstrate financial stability and improve your profile.
Document Your Financial Stability
If you’re employed, provide pay slips and bank statements as proof of steady income. Showing lenders that you’ve gained control over your finances may improve your loan prospects.
Conclusion
Getting a loan after settling a credit card may be tough but is achievable with the right approach. While settlement affects your credit score, you can still focus on credit recovery, explore other loan alternatives, and show responsible financial behavior to qualify for future loans. Just remember to approach lenders that cater to individuals in similar situations, as they may offer tailored products to meet your needs.
FAQ’s
Ans: Settlement can stay on your credit report for up to 7 years, impacting your creditworthiness.
Ans: Not necessarily. Some lenders may be willing to extend credit based on other factors, such as collateral or improved credit behaviour.
Ans: You cannot remove it directly, but its impact can lessen over time. Focus on rebuilding your credit score through consistent financial habits.
Ans: Yes, secured loans are generally easier to obtain as they involve collateral, reducing the lender’s risk.
Ans: In many cases, yes. Post-settlement, lenders may charge higher interest rates due to the perceived risk.
