Is there a risk of being blacklisted due to Credit Card Settlement?

Summary

Credit Card Settlement can prove to be a relief option for those who are unable to pay their dues. However, it puts a “Settled” mark on your credit report, which may cause difficulties in getting a loan or credit card in the future. A settlement can drop your CIBIL score by 50-100 points, which may make banks and financial institutions consider you a risky borrower and hesitate to give loans.

RBI or any other banking institution does not blacklist anyone, but frequent settlements can weaken your creditworthiness. If a settlement is to be done, don’t forget to obtain a “No Dues Certificate” and “NOC” so that there will be no issue in the future. Also, ask the bank to replace “Settled” with “Closed” so that your credit score improves at a rapid rate. Timely payment of EMIs, usage of less credit, and following good financial practices can also enhance the score.

Thus, wherever feasible, settle nothing and endeavor to pay off the total of the dues in stages. That is the best way to safeguard your credit rating and keep away from future financial problems.

Introduction

In today’s era, using credit cards has become very common. People use credit cards for small as well as big purchases. But when the payment is not made on time, then this facility becomes a cause of trouble. Many times, it happens that a person’s financial condition becomes weak – he loses his job, falls ill, or suffers a loss in business. In such a situation, when the credit card dues are not paid on time, the bank or credit card company offers a settlement to the borrower.

Credit Card Settlement means that instead of paying the entire dues, you settle your matter by making an agreement with the bank and paying a fixed amount. This amount is usually less than the original outstanding amount. Banks call it “One Time Settlement” or “Full & Final Settlement”. This option sounds relieving, but is it a good solution? And the biggest question – does this put a person on the blacklist?

The fear of being blacklisted worries many people. Especially when a person thinks of a settlement, this question repeatedly comes to his mind: “Will I get a loan or credit card again after this?” Or “Will my CIBIL Score fall drastically?” Or “Will the bank declare me a defaulter?”

In today’s article, we will understand in detail what is Credit Card Settlement, what effect does it have on your CIBIL score, does it pose a risk of being blacklisted, and what problems you may face in getting a loan or credit card in the future.

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?

Let us know what documents are required for Credit Card Settlement:

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employed)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

4. Credit Card Statement

You will have to provide the credit card statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.

5. Settlement Request Letter

If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

6. Settlement Offer Letter given by the bank

When the bank agrees to the settlement, they give you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

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.

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 Credit 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. Some banks can even put you in their blacklist, which can make you ineligible for any of their credit products.

• Doing a credit card settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

Conclusion

Credit Card Settlement can be a speedy relief measure, but its longer-term effects are grave. RBI or any bank does not keep any official list such as “Blacklist”, but once you settle, your credit report is marked “Settled”, which impacts your credit worthiness in the future.

This can decrease your CIBIL score, and it could become hard to avail a loan or a fresh credit card in the future. Numerous banks lend to such clients at a greater rate of interest or deny the request outright. Yet, in case you’re seriously in a financial crisis, settlement can become an ultimate recourse, but before implementing it, one must ponder alternative options like EMI restructuring or time extension by the bank.

Once settled, it is extremely essential to obtain a “No Dues Certificate” and “Closed” status reflected from the bank so that there is no issue in the future. If possible, attempt to enhance your credit score by slowly settling the whole outstanding amount so that you can easily avail loan and credit card facilities in the future.

Frequently Asked Questions (FAQ’s)