Tips to Boost CIBIL Score After Credit Card Settlement

Summary

Credit cards have become an important part of life these days, but they can also cause trouble if not paid on time. When a person spends too much and is unable to pay the credit card on time, then one has to go for “settlement” with the bank. Settlement means -an agreement on the amount decided between the bank and the customer, which is less than the actual dues. This method provides an immediate solution, but it has long-term effects on the CIBIL score.

The CIBIL score is a mirror of a person’s financial credibility. When the settlement information goes into the report, the score falls, and the bank believes that the person could not fulfill their responsibility properly. This affects the future loan, credit card, or any financial facility.

But there is no need to panic at all. Even after settlement, the CIBIL score can be improved again. For this, you will have to pay EMI or credit bill on time, take small loans and repay them on time, use credit limit less, and keep checking your CIBIL score from time to time.

Introduction

In today’s time, a credit card has become a necessity for every person. Whether it is online shopping, emergency expenses, or paying at a hotel, a credit card is useful everywhere. But many times, people spend more than their income and are unable to pay it on time. Due to this, the credit card dues on them keep increasing, and when the situation gets out of hand, they choose the option of ‘Credit Card Settlement’. This is a process in which the bank and the customer settle the dues by mutual consent, by taking some amount.

Although a settlement provides immediate relief, its biggest disadvantage is on your CIBIL score. Settlement is reported by banks as a “settled” status, which tells the credit bureau that you did not pay the entire loan or credit card. The effect of this is that your CIBIL score falls, and it becomes difficult to get a new loan or credit card in the future.

Now the question arises that once the credit card settlement is done, how to improve the CIBIL score again? Is there any way to make your score 750+ again? Will the banks trust you again? And will you be able to avail any financial facility again?

In today’s article, we will find answers to these questions and tell you how you can improve your CIBIL score again after credit card settlement. We will give you some practical and easy tips by adopting which you can adopt to gradually improve your credit history.

What is a CIBIL Score?

CIBIL Score is a three-digit number that tells how you have used the loan or CIBIL Score earlier. We can also call it the report card of your credit behavior. This score ranges from 300 to 900, and the higher the score, the better it is considered.

If your score is 750 or more, then the bank believes that you will repay the money responsibly, and you can easily get a loan or a CIBIL Score. But if the score is less than 600, then the bank suspects that you have not repaid the loan properly earlier, and they hesitate to give you a loan.

This score is made on the basis of your credit report, in which it is seen when you took the loan, how much you took, whether you paid the EMI on time or not, how many active CIBIL scores you have and how you used them.

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 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.
Possibility of being block	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 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 to settle your credit card without spoiling your credit score?

Credit card is a very useful financial tool, but if not used properly, it can also lead to heavy debt. Many times people have trouble paying credit card dues due to financial difficulties. In such a situation, credit card settlement can be an option, but it often hurts the credit score.

However, by adopting some smart methods, you can settle your credit card without spoiling the credit score. Let us understand in detail how you can settle the credit card dues properly and keep your credit score safe.

Methods of credit card settlement without spoiling the credit score

(i) Discuss the repayment plan with the bank

If you are unable to repay the credit card dues in one go, then you can ask for an EMI or repayment plan from the bank. Many banks offer their customers the option of repayment under flexible payment terms, which allows you to pay gradually, and your credit score is also not affected.

(ii) Choose the option of balance transfer

If you have more than one credit card, you can transfer the balance to a credit card with a lower interest rate. This will help you avoid high interest and repay your debt gradually.

(iii) Pay by taking a loan

If your credit score is good, you can pay off the credit card by taking a personal loan. Usually, the interest rate of a personal loan is lower than that of a credit card, which can give you financial relief.

(iv) Negotiate with the bank

If your financial situation is bad and you cannot pay a lump sum, try to negotiate with the bank. Some banks offer customers flexible payment options instead of “lump sum settlement”, which keeps your credit score safe.

How can you improve your CIBIL score after a credit card settlement?

10 best ways to improve CIBIL score after credit card settlement:

1. Check the CIBIL report carefully

Before starting the process of improving your credit score, you should check your CIBIL report thoroughly. For this, you can download your report from the official website of CIBIL.

• Check if there is any wrong information in your report.
• If there is any mistake, report it to CIBIL to correct it.

2. Change the settlement status to ‘Closed’

When you get a credit card settlement, the bank reports it as “Settled”. This status hurts your credit score.

• You can request the bank to update it as “Closed”.
• If possible, change it to “Fully Paid” by paying the remaining amount.

3. Make all payments on time

The most important thing to improve your credit score is to make payments on time.

• Pay all your loans and credit card EMIs on time.
• If there are any old dues left, clear them as soon as possible.

4. Get a new credit card and use it responsibly

If your credit score is not too bad, you can get a low-limit credit card and use it properly.

• Make small expenses every month and pay the entire bill on time.
• This will gradually improve your CIBIL score.

5. Keep the credit utilization ratio below 30%

• If your credit card limit is ₹1,00,000, try not to spend more than ₹30,000 every month.

• This shows that you are using your credit limit wisely.

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

Credit Card Settlement may be a relief option in a difficult situation, but it affects your credit history and CIBIL Score in the long run. When you are unable to make the full payment and settle the dues through settlement, this fact is recorded in the CIBIL Score and raises questions on your credibility. The biggest disadvantage of this is that in the future, when you apply for a new loan, credit card, or other financial facility, banks and financial institutions will consider you a risky customer and may reject your application.

But this situation is not permanent. If you’re determined and working in the correct direction, then you can rebuild your CIBIL score step by step again. The biggest thing for that is – making timely payments, utilizing small-value loans or credit cards wisely, monitoring your CIBIL Score from time to time, and rectifying any errors immediately. Along with this, you will have to maintain a balance between expenses and income so that you never reach a settlement situation in the future.

Now, it is important to note that a CIBIL score is not built or improved in a day. It requires constant effort, patience, and financial discipline. As you fulfill your obligations on time, your credit score gradually strengthens. After some time, you can again become a reliable customer for any bank or financial institution.

Frequently Asked Questions (FAQ’s)