Summary
It is important to use credit cards properly, but sometimes due to financial problems, people are not able to pay the outstanding amount on time. In such a situation, the bank provides two solutions – Credit Card Settlement vs Restructuring.
Credit Card Settlement is a process in which the customer gets the facility to settle the loan by paying a certain amount instead of the entire outstanding amount. This option is for those who are unable to pay the full amount. However, it hurts the credit score, and hence one may find it hard to get a loan or a new credit card in the future.
Conversely, in Credit Card Restructuring, the bank rearranges the customer’s due amount on revised terms, making it easy to pay. In this, the bank may lower the rate of interest, extend the EMI period, or offer other concessions. This is the appropriate choice for those people who can pay back the amount in installments and yet wish to secure their credit score.
Introduction
The use of credit cards (Credit Card Settlement vs Restructuring) has become common nowadays, but many times people are unable to repay the credit card amount on time. In such a situation, banks and financial institutions provide two options to provide relief to the customers – Credit Card Settlement and Credit Card Restructuring. However, many people do not understand the difference between these two and make the wrong decision.
When a customer is not able to repay the entire outstanding amount, the bank gives the option of Credit Card Settlement. In this, there is an agreement between the customer and the bank, where the customer gets permission to settle his debt by paying a certain amount instead of the full amount. However, this has a direct impact on the customer’s CIBIL score and it may be difficult for him to get a loan or a new credit card in the future.
On the other hand, Credit Card Restructuring is a process in which the bank restructures the existing liability of the customer. In this, the bank can reduce the interest rate, increase the EMI time, or provide other facilities so that the customer can easily repay his dues. This option is better for those who are in a position to repay their credit card dues gradually over time.
In this article, we will understand in detail the major differences between Credit Card Settlement vs Restructuring. We will know how these two processes work, what are their advantages and disadvantages, and which option will be right for you in which situation. If you are facing difficulty in repaying your credit card dues, then this article will prove to be very helpful for you.
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, 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 Credit 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 Credit 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 credit 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.
What is the difference between Credit Card Settlement vs Restructuring?
The main difference between Credit Card Settlement vs Restructuring
What is Credit Card Settlement?
Credit Card Settlement is a process in which the bank or the credit card issuing institution gives the customer the option to settle his debt by paying a certain amount instead of the entire outstanding amount.
- There is a settlement agreement between the bank and the customer.
- The customer has to pay a fixed amount instead of the full amount.
- The bank considers the remaining amount as “Bad Debt” and forgives it.
- After settlement, the customer’s credit score (CIBIL Score) is negatively affected.
- It may be difficult to get a loan or a new credit card in the future.
What is Credit Card Restructuring?
Credit Card Restructuring means that the bank or credit card company restructures the customer’s existing liabilities with new terms so that the customer can repay his loan in easy installments (EMI).
- The customer’s existing outstanding amount is restructured with a new tenure and lower interest rate.
- The customer has to pay the entire amount, but he gets relief in time and payment terms.
- This helps the customer avoid becoming a defaulter and his credit score is not affected much.
- This option is better for those who can repay their entire outstanding amount but are currently facing financial difficulties.
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.
- Credit 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 Credit 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.
- A Credit 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 Credit 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 Credit Card Settlement, the borrower’s credit score may be affected.
Conclusion
Credit Card Settlement vs Restructuring: It is important to use a credit card properly because if the dues are not paid on time, it can weaken your financial position. Many times people face difficulties in paying credit card dues due to unknown circumstances, such as – loss of job, loss in business, any major medical emergency, or other financial problems.
If your financial position has become so weak that you are not able to pay your entire dues, then Credit Card Settlement can be an option. In this, an agreement is made between the bank and the customer, where the customer gets a chance to settle his debt by paying a certain amount instead of the full amount.
On the other hand, if you can pay your entire dues, but are feeling difficult due to the existing payment terms, then Credit Card Restructuring can be a better solution for you. In this, the bank gives you the facility to pay under new terms, such as – a reduction in interest rate, restructuring of monthly EMI, or increase in the payment period.
Frequently Asked Questions (FAQ’s)
Ans: No, once the settlement is done, the bank will not bother you for the remaining amount. But it hurts your credit report.
Ans: Yes, when you settle, it is recorded as “Settled” in your credit report, which may reduce your credit score (CIBIL Score) and may cause difficulty in getting a loan in the future.
Ans: It may be difficult to get a loan after settlement. Banks may consider you a “High-Risk Borrower” by looking at your credit history and may refuse to give a loan or give a loan at a higher interest rate.
Ans: This can be difficult. Many banks avoid giving credit cards after settlement or provide very low credit limits.
Ans: The settlement entry can remain in your credit report for up to 7 years, which can make it difficult to get a loan or credit card during this time.
