What is Credit Card Settlement, and how is it done?

Summary

Credit Card Settlement is a process in which the customer settles with the bank when he is unable to pay the entire outstanding amount. Under this settlement, the customer can get rid of the debt by paying a small amount determined by the bank. This option is beneficial for those who are facing a financial crisis and are not in a position to make full payment. However, it is not a permanent solution, and it is important to understand all the aspects before adopting it.

The biggest disadvantage of Credit Card Settlement falls on the CIBIL score. When a customer settles, it is recorded as “Settled” in his credit report, which may make it difficult to get any kind of loan or credit card in the future. Apart from this, some banks may also refuse to provide services in the future to the customers who settle.

If you have to settle, then first talk to the bank and take the entire process in writing. After the settlement is completed, do not forget to get a No Dues Certificate from the banks so that there is no problem in the future. Apart from this, focus on improving your CIBIL score after settlement so that your financial position remains strong.

Introduction

In today’s time, the use of credit cards has increased a lot. People use it for shopping, bill payment, and emergency expenses. But sometimes, it becomes difficult to repay the credit card dues on time due to financial constraints, job loss, medical emergencies, or other reasons. When the cardholder is unable to pay the entire dues, the bank or credit card company can offer a settlement. This is called Credit Card Settlement.

Credit Card Settlement means that the bank gives you a chance to repay the loan by paying less than the full outstanding amount. This can prove to be a relief measure for those who are stuck in a financial crisis and are unable to make full payments. But this process is not easy and it also has some advantages and disadvantages, which are important to understand.

When you do not pay the credit card bill for several months, the bank may consider it a non-performing asset (NPA). In such a situation, the bank can send a recovery agent or a legal notice. If you are not in a position to pay, the bank can give you the option of settlement. In this process, there is a conversation between the bank and the customer in which permission is given to repay the loan by paying a lesser amount based on an agreement.

Further in this article, we will know in detail what the process of Credit Card Settlement is, how to talk to the bank, and what documents are required.

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 are the features of Credit Card Settlement?

The following are some of its main features:

• The process of 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 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 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:

Identity Proof

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

Address Proof

• Aadhaar Card
• Electricity or Water Bill
• Bank Passbook or Statement
• Ration Card
• Passport

Income Proof

• Salary Slip (last 3-6 months)
• Bank Statement (last 6-12 months)
• Income Tax Return (ITR)
• Form-16

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.

CIBIL Report

During a 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.

Settlement Request Letter

If you want to get a 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 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 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.

• 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 loan 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 loan 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.

What are the benefits of doing Credit Card Settlement?

It has many benefits, which are as follows:

• Although Card loan 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.

• Through Card loan 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.

• 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.

What are the disadvantages of doing a Credit Card Settlement?

It has many disadvantages, which are as follows:

• During Credit Card loan 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 Credit Card loan Settlement, the borrower’s credit score may be affected.

• In the future, the borrower may have difficulty in getting loans from these institutions.

• A Card loan Settlement may create difficulties in taking new loans or getting credit cards in the future.

• Due to 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.

Conclusion

Card loan Settlement is an option that can prove beneficial for those who are unable to pay their dues in full. This process is an agreement between the bank and the customer in which the bank recovers the loan by giving some concession, and the customer can get rid of the dues by paying a fixed amount. However, this is not an easy decision, and it is important to understand every aspect carefully before taking it.

A settlement may give you immediate relief, but its effect lasts for a long time. The biggest loss is on your CIBIL score, which may make it difficult to get a loan or credit card in the future. Apart from this, the bank can also refuse to provide you services again. Therefore, if you have any other possibility to make full payment, then you should try it first.

If you decide to do a Card Settlement, then first of all, negotiate with the bank properly. Try to have the entire settlement agreement in writing and take a No Dues Certificate from the ban so that there is no problem in the future. Additionally, practice good financial habits to improve your credit score after settlement, such as making timely payments, avoiding unnecessary debt, and maintaining a clean credit history.

Frequently Asked Questions (FAQ’s)