Is Credit Card Settlement Legal?

Summary

Credit Card Settlement is a legal process in which the bank gives the customer a chance to reduce the outstanding amount by giving some discount. When a person is unable to pay his entire credit card dues, then the option of settlement can be adopted by talking to the bank. This gives some relief to the person, but it also has negative effects.

After settlement, the status of “Settled” is recorded in the credit report, which can affect the CIBIL score. This can affect taking any type of loan in the future because banks usually avoid giving loans to those customers whose credit report has “Settled”. However, the biggest advantage of a settlement is that it can provide relief from legal action and increasing interest.

If you have other options, you should avoid settlement and try to repay the entire amount. It is better to pay slowly by taking the EMI option so that your credit score does not deteriorate. It is important to get a written agreement from the bank before settling so that there is no dispute later. Also, measures should be taken to improve the credit score after settlement.

Introduction

Nowadays the use of credit card is increasing rapidly. People use it for shopping, online payment and emergency expenses. However, many times people spend more than their credit limit and are unable to pay it on time. When the credit card dues become very high and there is difficulty in paying it, then an option comes up – Credit Card Settlement.

Credit Card Settlement is a process in which the bank or the institution issuing the credit card gives the cardholder the option to settle by giving some discount on the total outstanding amount. This means that if you have a credit card due of ₹ 1,00,000, but you are unable to pay the full amount, then the bank can settle it for ₹ 60,000 or any other amount by negotiating with you.

Yes, Credit Card Settlement is completely legal. Under Indian law, any bank or financial institution has the right to settle its debt by negotiating with its customers. But an important thing here is that when the bank settles your credit card, it is reported as “Settled”, which can hurt your credit score.

Credit bureaus (CIBIL, Experian, Equifax, etc.) record it in your credit report, which may cause problems in taking loans in the future. Therefore, Credit Card Settlement should be adopted only as a last resort. If you have any other way to make full payment, give it priority.

In today’s article, we will understand what is Credit Card Settlement, how it works, and whether it is legally correct to do it. Also, we will discuss its advantages and disadvantages and also know what things should be kept in mind before settling.

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 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 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.

How to apply for 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 the 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 need 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 in 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?

Let us know what are the benefits of doing Credit Card Settlement:

• If your credit card dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your credit card continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on credit cards is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While settlement will bring down your CIBIL score, provided you exercise financial responsibility after settlement and settle your other loans and bills punctually, you will improve your score over a period of time.

• In Credit Card Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the persons who desire to come out of debt by increasing a little money at a time.

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on better financial status again.

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

Let us know in detail what the disadvantages of doing a Card Settlement are.

• The biggest disadvantage of Credit Card Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new credit card in the future.

• If you have done a Credit Card Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a credit card with a bank, then the same bank can refuse to issue you a credit card again in the future.

• In many cases, the bank can charge you extra charges or settlement fees in the settlement process. Apart from this, if the bank reports the amount waived under the settlement as income, then you may also have to pay tax on it.

Conclusion

Credit Card Settlement is a completely legal process and many banks and financial institutions provide this facility. If you are unable to pay the full credit card dues, then by negotiating with the bank, a settlement can be made for a lesser amount. This is a solution that can be helpful for those who are going through a financial crisis and are not in a position to pay the full amount.

However, Credit Card Settlement also has some negative effects, which are also important to understand. When you settle your credit card dues with the bank instead of paying them in full, the credit bureaus (CIBIL, Experian, Equifax) record it as “settled”. This status can reduce your credit score, which may cause problems in getting a loan or a new credit card in the future. Many banks and financial institutions hesitate to give loans to customers whose old debt has been settled.

Therefore, Settlement should be adopted only as a last option. If you have the option of paying in EMIs or extending the payment deadline by talking to the bank, then you should opt for that first. Before settling, it is important to get a written consent letter from the bank so that there is no dispute in the future.

Frequently Asked Questions (FAQ’s)