What is the best time to do a credit card settlement?

Summary

Credit Card Settlement is a process in which the bank settles the loan by giving some concession if the full payment of the outstanding amount is not received. This can prove to be the last option for those who are struggling financially and are unable to repay the entire loan. Even though this facility provides you with instant relief, it has numerous ill effects.

Settlement can ruin the CIBIL score, which can lead to difficulty in availing loans and credit cards in the future. Banks reflect it as “Settled” status in the credit report, which can impact your financial record for a period of 7 years. This not only causes problems in getting a home loan or personal loan, but many banks do not issue credit cards again to customers who settle.

If you decide to settle, you must take a “No Due Certificate” from the bank so that there is no legal or financial problem in the future. Instead of settlement, consider other options, such as EMI facility, balance transfer, or loan restructuring, so that you can resolve the issue without harming your credit score.

Introduction

In today’s time, credit cardshaves become a common need of the people. It not only provides you the facility to spend money immediatey, but also provides many types of rewards and cashback. But if you don’t pay your credit card bill on time, it can turn into a major issue. Rising interest, penalty charges, and a lower CIBIL score all occur when you fail to clear your outstanding credit card bills on time. In this situation, people think about Credit Card Settlement.

Credit Card Settlement means paying a fixed amount bagreeingnt with the bank or credit card company, which may be less than the original outstanding amount. This facility proves beneficial for those who have become financially weak and are unable to pay the credit card in full. However, it is very important to understand the right time and situation before making a settlement so that you can avoid any wrong decision.

Now, the biggest question is: What is the right time to do a Credit Card Settlement? Should you pursue it only when you’re completely bankrupt or facing a financial crisis? Many people believe they should choose settlement only when debt overwhelms them and no options remain. But the truth is that by settling at the right time, you can secure your financial future.

In today’s article, we will discuss in detail the best time to do a Ca credit Card Settlement, the situations in which it should be doneand the situations in which it should be avoided. Along with this, we will also understand the important things related to settlement and its advantages and disadvantages so that you can make a wise decision.

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 settle your credit card debt, you must provide a written request letter to the bank. In this letter, describe your current financial situation and explain your need for a 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 the bank keeps calling you for recovery and threatens you with legal action, this signals that you should act decisively 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.

• 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.

• 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.

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.

Conclusion

Credit Card Settlement is an option that should be adopted only when your financial condition is very bad and you are unable to pay the entire dues in any way. It gives you immediate relief, but its long-term effects can prove to be very serious. Settlement reduces your CIBIL score, which may cause problems in getting loans and credit cards in the future. Apart from this, banks may consider you a high-risk customer, due to which you may get loans only at high interest rates, or the banks may completely reject your loan application.

The worst part of a settlement is that your credit report continues to reflect this information for 7 years, hence reducing your financial credibility. If later on you wish to avail a large loan, like home loan or business loan, then the bank might decline your application based on settlement or request you to pay the entire past dues.

If settlement is the last option remaining for you, never forget to obtain a “No Due Certificate” from the bank so that there will not be any legal issues in the future. Also, after settling, be financially disciplined and make good use of credit cards to never find yourself in such a position again.

Frequently Asked Questions (FAQ’s)