How to Settle Credit Card Dues and Avoid Over-Limit Charges?

Summary

Credit Card Settlement: Credit cards offer great convenience but can lead to financial woes if abused. Over-limit spending is one of the biggest issues with credit card users, where they spend beyond their respective credit limit. Banks charge over-limit fees when this happens, and your credit report could also suffer adversely.

Don’t do this by tracking your spending regularly. Always be aware of your total available credit and what percentage of that you are using. Using just 30–40% of your credit limit is recommended as a way to maintain a balanced credit history. Having alerts within your bank app remind you when you’re approaching your limit is also useful.

Another sound practice is to pay more than once during the month rather than paying at the end. This keeps your balance low and your utilization in check. If you’re constantly spending close to your limit, consider requesting a credit limit increase, but only if you can utilize your money responsibly.

Introduction

Credit cards have turned into an essential part of our daily lives. They give us the luxury of spending and settling later. Shopping, ticket reservations, or meeting an emergency – the first choice is often a credit card. Yet, while it is easy to use a credit card, its payment and due handling are equally crucial. Unless it is controlled, it may lead to a debt trap, high-interest rates, and over-limit fees. Most people face problems when they go beyond their credit limit or fail to pay their bills.

When you use your credit card beyond its established limit, the bank charges an extra fee called an “over-limit charge.” It may be a flat fee or a rate against the excess amount spent. These are normally quite steep fees and can escalate your debt very quickly. Similarly, if you do not pay your total dues on the due date, interest starts to accrue, and your minimum due keeps rising.

Luckily, there are ways through which you can settle your credit card dues and avoid the over-limit trap. It’s essential to be careful and do it on time. First of all, it is all about becoming comfortable with your credit card statement and keeping track of your spending. Being aware of how much you owe, the interest rate, and when the due date is will put you in control.

In this article, we will walk you through step by step on how you can pay your credit card dues, how to do it the best way possible, and how to avoid over-limit fees. If you are already facing problems with credit cards or simply want to play it safe, these tips will tell you how you can wisely utilize your credit card and avoid any undesired financial mess.

How to avoid over-limit usage of a credit card?

Here are some quick and easy measures to keep you within your credit limit:

1. Know Your Credit Limit

• Remind yourself at all times of your credit card limit.

• You can refer to your bank’s mobile banking app, monthly statement, or customer care.

2. Check Your Spending

• Track spending using your bank’s mobile app or online banking.

• Remember to run a daily or weekly spend check.

3. Set Usage Reminders

• Most banks will allow you to arrange SMS or e-mail reminders when your usage is at a specified percentage (say 70% or 90%) of your limit.

• These reminders prevent overuse by accident.

4. Maintain a Usage Limit (30-40%)

• Experts suggest using no more than 30–40% of your overall credit limit.

• This maintains your credit utilization ratio low, which is healthy for your credit score.

5. Pay Multiple Times in a Month

• Rather than waiting until the due date, pay in installments during the month.

• This preserves your limit for use going forward and keeps your balance low.

6. Don’t pay overpriced fees or automatic subscriptions.

• Look for over-spends and auto-debits that exceed your limit.

• If not, pick any alternative form of payment, such as UPI or a debit card.

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 Credit Card Settlement.

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 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.

How to apply for a Credit Card Settlement?

If you are unable to pay your credit card dues and are troubled by heavy interest rates, Credit Card Settlement can be a possible solution. Under this process, the bank or credit card company can waive off part of your total outstanding amount and give you the option to make a lump sum payment (One-time Settlement). However, this can affect your CIBIL score, so adopt it only as a last option.

Step-by-step process to apply for Credit Card Settlement

• First of all, decide that you are not in a position to pay the entire credit card dues.

• Check your income and expenses and decide how much you can pay at most.

• Talk to the customer care of your bank or credit card company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement, make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

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 best time to do a credit card settlement?

Everyone’s needs and time for Credit Card Settlement may be different, but some important points given below can help you –

• If your credit card bill has become very high, and you are managing by paying only the minimum due, then this may be a sign that you should consider settlement.

• If you have lost your job or your sources of income have suddenly ended, and there is no possibility of quick improvement in the future, then taking the option of settlement may prove to be better for you.

• The interest charged on n credit card can usually be up to 30-45% per annum. If you are paying only the interest and the principal is not decreasing, then considering a settlement can prove to be the right option.

• If you already have a home loan, personal loan, or other liabilities and are having difficulty paying the credit card, then settling in time can prove to be beneficial.

• If you are getting repeated recovery calls from the bank and are being threatened with legal action, then this is a sign that you should take some concrete steps soon.

Is Credit Card Settlement Legal?

Yes, Credit Card Settlement is fully legal. As per Indian law, any bank or financial institution can negotiate with its customers and settle the debt.

But here’s a good thing to remember

When your bank settles your credit card, it gets recorded as “settled”, which negatively affects your credit score. The credit bureaus (CIBIL, Experian, Equifax, etc.) record it in your credit report, which can lead to problems in getting a loan in the future.

So, Credit Card Settlement should be adopted as a last resort only. If you have any other way to pay in full, pursue it.

What are the advantages (Pros) of doing Credit Card Settlement?

It has many advantages, which are as follows:

• 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.

• 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.

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

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

What are the disadvantages (Cons) of doing a Credit Card Settlement?

It has many disadvantages, which are as follows:

• 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.

• 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.

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

• 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.

Conclusion

Having a credit card is very useful in paying for your daily needs, establishing a credit history, and earning rewards and benefits. But these rewards are accompanied by a huge responsibility — the responsibility to use them wisely and responsibly. One of the most common mistakes that many individuals make is going over the spending limit on their credit card and thus ending up with over-limit fees. Not only do these fees pay for things, but they also affect your financial status and creditworthiness.

When you exceed your credit limit, it notifies the bank that you cannot handle your credit. It also decreases your likelihood of obtaining future loans or credit cards. It is not just that the over-limit fees, high interest rates, and late fees can slowly push you into the trap of debt, and it is very hard to get out of it.

Simple things like keeping track of your expenditure, setting up usage alerts, paying your bills in time, and not making unnecessary transactions can make a big difference. It is also a good idea to keep your utilization at 30-40% of your total limit. This will save you from over-limit usage as well as improve your credit score in the long run. 

Frequently Asked Questions (FAQ’s)