Summary
Credit Card Settlement is done when a person is unable to pay the full dues of his credit card and requests the bank to waive off some amount as relief. This may seem beneficial in the short term, but it has a negative impact in the long run, especially on the chances of getting a loan in the future.
When a person settles, it is recorded as “Settled” in his credit report. This reduces the credit score, which may make it difficult to apply for a home loan, car loan, personal loan, or any other type of loan in the future. Many banks and financial institutions consider settlement customers as “High-Risk Borrowers” and avoid giving them loans or giving loans at a higher interest rate.
In addition, Credit Card Settlement may reduce your credit limit and it may also be difficult to get new credit cards in the future. The settlement entry can remain in your credit report for up to 7 years, which may affect your financial credibility during this time.
Introduction
In today’s time, credit cards have become an important part of our financial life. It allows us to borrow for immediate needs, but it can also become a big headache if not paid on time. Many times people are unable to repay their credit card dues in full due to financial problems, and in such a situation they opt for Credit Card Settlement.
When you do a Credit Card Settlement, the bank or credit card company settles the matter by giving some discount on your total outstanding amount. This means that you have not paid the full amount, but the bank has waived some money. Although it can help solve your financial crisis, it may affect your credit score (CIBIL Score) and your credit history, which may make it difficult to get a loan in the future.
Whenever you do a Credit Card Settlement, the bank records it as “Settled” in your credit report. This shows that you have not made the full payment, which may reduce your CIBIL score. Banks and other financial institutions approve loans by looking at your credit history. If a settlement is seen in your report, then banks may avoid giving you a new loan.
Even if you somehow get a loan, then the bank may give you a loan at a high-interest rate because they consider you a “Risky Borrower”. After settlement, your credit profile becomes weak, due to which you may face difficulty in increasing the credit card limit in the future.
In this article, we will learn what is Credit Card Settlement, how it affects your credit score, and what is its effect on taking a loan in the future. Also, we will understand which better options can be adopted instead of settlement, so that your credit history is not affected adversely.
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 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 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 Credit Card Settlement affect future loans?
Let us learn in detail about how to Card Settlement affects your credit score, loan approval, and interest rates.
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 of a loan in the future.
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.
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.
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 amount of credit card in the future.
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 Credit Card Settlement?
It has many benefits, which are as follows:
- Through 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 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 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 that can give you immediate relief from a financial crisis, but its long-term effects cannot be ignored. When you settle with the bank, it is recorded as “Settled” in your credit report, which reduces your credit score (CIBIL Score). This can affect your loan approval, interest rate, and credit limit in the future.
If you have to take a home loan, car loan, personal loan, or any other type of loan in the future, the bank will check your credit report. If there is a settlement record, the bank might consider you a “risky borrower” and deny you a loan or offer you a loan at an extremely high rate of interest.
Hence, you must consider twice before Card Settlement. If at all possible, request the bank for an EMI facility or loan restructuring, so that you will not have to go for settlement. Timely payment of your credit card dues and keeping your expenses in check are the best means of avoiding any financial troubles in the future.
Frequently Asked Questions (FAQ’s)
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.
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.
