Does Credit Card Settlement Affect Future Loans?

Summary

Credit card has become an essential financial tool in today’s fast-paced life. But sometimes due to excessive spending or not being able to pay on time, it becomes difficult for the cardholder to repay his dues. In such a situation, some people choose the option of Credit Card Settlement, in which the account is closed by paying some amount by agreeing with the bank.

Although this option gives immediate relief, it can cause many problems in the future. The first and biggest impact is on your CIBIL score, which is the most important criterion for taking any type of loan. As soon as the tag of “settled” is added to your credit report, banks or NBFCs start looking at your loan application with suspicion.

Apart from this, many times banks refuse to give loans or offer loans at a higher interest rate. At the same time, conditions like additional documents, demand for a co-guarantor, or a limited loan amount can also come up. Therefore, Card Settlement should be adopted only as a last option.

Introduction

Nowadays, everyone uses a credit card. It is not only convenient, but also helps immediately when there is a sudden need for money. But sometimes, due to excessive spending or not being able to pay on time, the outstanding credit card keeps increasing. When the debt increases so much that it becomes difficult to repay it, people often opt for a Credit Card Settlement. That is, an agreement is made with the bank to close the account by paying some amount from the total outstanding.

Although this method sounds easy and relieving, it is very important to understand the problems hidden behind it. Especially when you are planning to take another loan in the future – be it a home loan, car loan or personal loan.

First of all, it is important to know that card settlement is considered a kind of default. Banks or financial institutions see it in such a way that the customer did not pay the entire outstanding amount and fulfilled their obligation by making a settlement. This has a direct impact on your CIBIL Score and Credit Report. And as we know, your CIBIL score plays a very important role in getting approval for any loan.

In today’s article, we will know in detail what kind of difficulties can arise in taking a loan after card settlement, what effect it has on your credit profile, and how you can get out of these difficulties. If you are also thinking of applying for a loan in the future and have ever settled a card before, then this information can prove to be very useful 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 a 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 rate.
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, a car loan, or any other loan.	Credit card companies may refuse to issue the card.

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 a 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.

How does a Credit Card Settlement affect future loans?

Let us learn in detail about how Credit Card Settlement affects your credit score, loan approval, and interest rates.

1. Effect on credit score

Every time you pay your credit card instead of paying the full dues, it is marked in the credit report as “Settled”. This indicates that you have not paid back the full amount to the bank, which lowers your CIBIL score (Credit Score). A low credit score may cause problems in availing a loan in the future.

2. Problem with loan approval

When you go for a home loan, car loan, or personal loan from a bank or NBFC, they initially verify your credit score and credit report. If there is an entry of settlement in your report, the bank might consider you a “Risky Borrower” and deny lending you a loan.

3. The interest rate can be high

Even if you get a loan in some way or another, the bank can extend a loan with a high interest rate. That is because the bank believes you have not been paying in entirety previously, increasing their risk factor.

4. Credit card limit reduction

Once your credit card is settled, banks and financial institutions can refuse to issue you a new credit card limit or cut down your current limit. This can land you in trouble while using a large number of credit cards in the future.

5. Effect on other financial services as well

Not only loans but also credit card upgrades, overdraft facilities, EMI options, and other financial products can be impacted. Pre-approved loans and offers are not provided by most banks to those customers who have a history of settlement in their credit reports.

What are the benefits of doing a 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, they can gradually improve their 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 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 their freedom.

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

Conclusion

In conclusion, Credit Card settlements can be a temporary solution, but their long-term effects can prove to be quite serious. When you are unable to pay your credit card dues in full for some reason and settle with the bank, it becomes a kind of “blemish in credit history” for you. This blemish can become a hindrance for you in implementing new financial plans in the future, especially when you are thinking of taking a home loan, personal loan, or car loan.

Along with this, it is also important to understand that banks and financial institutions decide whether you are a reliable borrower or not based on your CIBIL score and credit report. And when a word like “settled” appears in your record, their trust may waver. Therefore, it can be said that while doing a credit card settlement does provide relief for some time, its long-term consequences cannot be avoided.

However, the good thing is that it is also possible to improve the situation. If you improve your credit habits over time, take small loans and pay them on time, and fulfill new credit responsibilities properly, then gradually your CIBIL score can be strengthened again. Apart from this, you can try to clarify the old settlement by writing a letter to CIBIL, or change “settled” to “closed” by paying the entire outstanding amount – this can also be a positive step.

Frequently Asked Questions (FAQ’s)