Bank interest on credit card settlement

Summary

Credit Card Settlement is done when the customer is unable to pay the entire outstanding amount and gets some discount from the bank. However, an important question arises in this, whether the bank charge interest on settlement? The answer to this depends on the customer’s situation, the bank’s policy, and the type of settlement. Typically, the bank can charge interest and other fees at the time of settlement, particularly if the payment is made through installments (EMI).

Credit Card Settlement can negatively affect the CIBIL score, which can lead to difficulties in obtaining a loan or a new credit card in the future. Also, the bank may put the customer in the high-risk category after settlement, which may cause problems in getting financial facilities in the future. Therefore, it is important to get clear information about the interest and other charges from the bank before settlement.

It would be better if the customer pays on time so that there is no need for settlement. If you are having difficulty making the payment, asking the bank for an EMI plan or making a lump sum payment may prove to be a better option. This can reduce interest and additional charges. In the end, using credit cards wisely is the best way to avoid financial troubles.

Introduction

Credit card is a very convenient financial tool, but if not used properly, it can cause financial trouble. When the cardholder is unable to pay the full dues of his credit card for some reason, he can opt for Credit Card Settlement. But this process comes with many difficulties, one of the biggest questions of which is – does the bank charge interest on Credit Card Settlement?

When a person is unable to pay his credit card dues on time, the bank or financial institution charges late payment charges, penalties, and high interest rates. If the situation gets worse and the customer is unable to pay the full amount, then the bank can offer him a settlement. Credit Card Settlement means that an agreement is made between the bank and the customer, in which the bank agrees to accept a certain amount by giving some discount from the total outstanding amount.

But the important question here arises does the bank charge interest even after this settlement? The answer depends on the customer’s situation, the bank’s policy, and the type of settlement. Usually, when a person opts for settlement, the bank may waive off or reduce the interest. But in many cases, banks charge a certain amount of interest during settlement as well, especially if the payment is being made in installments.

In this article, we will know in detail why and how banks charge interest on credit card settlements, under what circumstances the interest can be waived, and what measures should be adopted to avoid it.

What is a Credit Card Settlement?

Credit Card Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your credit card by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your credit card debt is increasing.

This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend Credit Card Settlement.

What are the features of Credit Card Settlement?

The following are some of its main features:

• The process of Credit Card Settlement is easy. You have to contact Home Credit and agree to their terms.

• The settlement process is completed quickly, which helps you stabilize your financial situation.

• After the settlement, Home Credit issues a No Due Certificate, which proves that your loan is now complete. 

• Doing a Credit Card Settlement can affect your credit score. It is recorded as “settled” in your credit report, which can create difficulty in taking loans in the future.

• This option is available only when the borrower is completely unable to repay the loan and has used all other options.

• In Credit Card Settlement, you do not have to repay the entire loan amount. You can settle your loan by paying only a certain part.

What are the reasons for doing a Credit Card Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then Credit Card Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

What is the difference between a Personal Loan Settlement and a Credit Card Loan Settlement?

Although both Personal Loan settlements and Credit Card Settlements aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Personal Loan Settlement	Credit Card Settlement
Type	Settlement of any type of loan (personal loan settlement, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed amount.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, car loan, or any other loan	Credit card companies may refuse to issue the card.
Possibility of being blacklisted	Less	especially from credit card companies

What documents are required to do a Credit Card Settlement?

If, for some reason, you are not able to pay your credit card in full, then a Credit Card Settlement can be an option. In this, the bank or loan-giving institution (NBFC) settles your outstanding loan for a certain amount by giving some discount. But to complete this process, you have to submit some important documents.

Documents required for Credit Card Settlement:

1. Identity Proof

• Aadhaar Card
• PAN Card
• Passport
• Voter ID
• Driving License

2. Address Proof

• Aadhaar Card
• Electricity or Water Bill
• Bank Passbook or Statement
• Ration Card
• Passport

3. Income Proof

• Salary Slip (last 3-6 months)
• Bank Statement (last 6-12 months)
• Income Tax Return (ITR)
• Form-16

4. Loan Agreement

This is the document issued by the bank or NBFC at the time of giving the loan. It contains the details of the loan terms and your outstanding amount.

5. CIBIL Report

During a Credit Card Settlement, the bank checks your CIBIL score, which gives them information about your credit history. This report shows your credit behavior and current loan status.

6. Settlement Request Letter

If you want to get a Credit Card Settlement done, then you will have to give a written request letter to the bank, in which you will tell about your current financial situation and the need for settlement.

What to do before doing a Credit Card Settlement?

Below are some steps that should be followed before a Card Settlement:

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Credit Card Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how Credit Card Settlement will affect your credit score.

• If you decide to do a Credit Card Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charged any hidden fees.

• Doing a Credit Card Settlement can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Credit Card Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

What is the Credit Card Settlement Process?

The process of Card Settlement is explained below in simple terms:

• First, determine why you are unable to repay the entire loan amount. Check your financial situation and payment capacity.

• Contact Home Credit customer care or the nearest branch. Tell them about your current financial problems and discuss the option of Credit Card Settlement.

• Home Credit will understand your situation and make a settlement offer. This offer will be for repaying a part of the loan amount.

• Read the terms mentioned in the settlement offer carefully. Make sure you understand how the settlement will affect your credit score and future loan eligibility.

• Once you accept the offer, repay the agreed settlement amount on time. This is usually a lump sum payment.

• After the payment, get a written proof (No Due Certificate) from Home Credit. This proof will be proof of the completion of your credit card settlement and will help avoid any dispute in the future.

• Check your credit report after the settlement. Make sure the card settlement details are recorded correctly.

What is the impact on the CIBIL score after a Credit Card Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a credit card or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, credit card, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

Do banks charge interest on credit card settlements?

Yes, banks usually charge interest on card settlements, but it completely depends on the bank’s policy and the type of settlement. Credit card settlement means that the bank gives the customer the option to pay a certain amount by giving some discount on the entire outstanding amount. However, interest, penalty charges, and other charges may be added to this process.

How is interest charged?

• If the credit card dues are pending for a long time, then the bank has already added interest on it.

• If the bank gives the customer the option to make a lump sum payment, then the interest may be less. But if the bank allows payment in installments, then the interest rate may apply.

• Sometimes the bank waives the interest but charges other charges like late fees, penalties, and processing charges.

Chances of interest waiver

• If the customer makes a lump sum payment, the bank may waive the interest.

• If the customer negotiates and negotiates well with the bank, the interest may be reduced.

• It also depends on the bank’s policy and the customer’s credit profile.

What are the benefits of doing Credit Card Settlement?

It has many benefits, which are as follows:

• Through Credit Card Settlement, the borrower gets a chance to get a part of his loan waived off.

• This helps in improving his financial condition and gives him relief from a heavy financial burden.

• Card Settlement improves the financial condition of the borrower.

• With Credit Card Settlement, you can manage your income and expenses better and avoid a financial crisis in the future.

• Although Card Settlement can affect the borrower’s credit score, by following the agreement on time and in the right manner, he can gradually improve his credit score.

• The heavy burden of debt often causes mental stress. Loan Settlement gives relief to the borrower from this stress, and he can get mental peace in his life.

What are the disadvantages of doing a Credit Card Settlement?

It has many disadvantages, which are as follows:

• In the future, the borrower may have difficulty in getting loans from these institutions.

• Card Settlement may create difficulties in taking new loans or getting credit cards in the future.

• Due to Credit Card Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

• Through Card Settlement, the entire loan of the borrower is not waived off. He still has to pay some amount, which may affect his financial position.

• During Credit Card Settlement, the agreement between the bank and the borrower contains many conditions. The borrower is required to follow these conditions, which may limit his freedom.

• After a Card Settlement, the borrower’s credit score may be affected.

Conclusion

Credit Card Settlement is an option when a customer is unable to pay the full outstanding amount of his credit card and seeks concession from the bank. However, it is important to note that settlement may result in interest, late fees, and other charges being charged by the bank. In some cases, if the customer makes a lump sum payment, the bank may waive the interest, but many times interest rates are applicable on payment in installments.

If you are going to do a Card Settlement, first clearly understand all the terms from the bank. It is important to know that after settlement your CIBIL score may be affected, which may make it difficult to get a loan or new credit card in the future.

It would be better if you consider the options of full payment or an EMI plan instead of settlement. This will not only protect your credit score, but you will also not have to face any financial problems in the future. If you are not looking at any other option apart from settlement, try to negotiate with the bank to get a bigger discount on interest and other charges.

Frequently Asked Questions (FAQ’s)