Does Credit Card Settlement Affect CIBIL Score

One time settlement of your credit card bills may severely affect your CIBIL score. To know how credit card settlements affect your CIBIL score, read ahead. 

What is Credit Card Settlement?

When you take a credit card, you are supposed to make payments every month. Credit card vendors even accept the minimum due amount to help you avoid penalties. 

But what happens when due to an unavoidable circumstance, you are unable to pay your dues?

Often the credit card vendor may agree for a ‘settlement’. It refers to paying a smaller amount of money as a lump sum payment. Once you pay that amount, your dues are considered settled, and you are no longer obliged to pay any money to them. 

Does One Time Settlement Affect CIBIL Score?

The term ‘settled’ has a positive connotation but it is far from it. This indicates a negative credit behavior as you were unable to pay your dues in full. It reflects poorly on your report and taking future loans may become challenging for you. 

Settling a credit card account can lower your CIBIL score by 75-100 points at once. Banks may even be hesitant to give you loans if your past loan has a ‘settled’ status. Thus, this should be your last resort and you should consider all available options before choosing this. 

Difference between ‘Closed’ and ‘Settled’ 

When you repay a loan in full through the total tenure, it is marked as ‘closed’. This means that you don’t owe anything to the bank, and you paid your dues in full. This is the ideal status of a loan, and it doesn’t hurt your credit score.

When you are unable to pay your dues in full, you have an option to settle the loan with a one time payment. This amount is always decided after thorough discussion between both parties. Incidents like loss of a job, medical emergencies, or any other genuine problem are valid reasons for a settlement. 

It is a great relief for the borrower but they have a huge negative impact on the credit score. The settled tag can stay on your credit report for as long as 7 years. 

Tips to Improve CIBIL After Credit Card Settlement

You now know that a one time settlement might negatively impact your credit score. But what if you have already settled your loan?

Here are some tips to build your credit score after you have settled an account - 

This is the best option you have to change the status of your past loan from ‘settled’ to ‘closed’. Reach out to your credit card vendor, and pay off your outstanding debt, no matter how much time has passed after your settlement.

Once you have paid it off, you can raise a dispute on the CIBIL website, and get your status updated. This way, not only will your credit history be cleared, even your score might improve. 

If you choose to go back and repay the outstanding amount, make sure to ask for a ‘No Objection Certificate’ or a ‘No Dues Certificate’ from your lender. This way you will have written proof of you having cleared all your dues. 

You must also ask for such a document from your credit card vendor within 45 days of closing a credit card. This shows responsible credit behavior. 

This is an essential tip in general but is crucial if you just got your ‘settled’ tag removed. Don’t make unnecessary loan queries or apply for credit cards which will lead to hard pulls on your credit score. 

It will make you look credit hungry and affect your credit score negatively.

Credit Utilization Ratio (CUR) is the ratio of credit utilized to the credit available to you. The advisable CUR is 30%, and you should maintain it if you are trying to rebuild your credit score.

Often people who have gotten out of credit card debt refrain from using their cards, which is a blunder. You can improve your credit score only by taking and repaying credit at the right time. 

So, make sure to use your credit cards optimally, and pay the bills in full each time.

Pay all your EMIs and your credit card bills in full within the due date. 

Prioritize your bills over your monthly expenditures if necessary, and it will help improve your credit score quickly.  

Conclusion

Life is not predictable and often accidents can derail you from paying your bills on time. In such cases, it is important to communicate with your lender, and look for an option which is in both of your interests.

Settling the loan might seem tempting, but it can have major negative impacts on your credit history. So, make sure to ask for a break from your EMIs, or ask for help from all available sources. 

If all else fails, and you have to settle a loan, don’t worry. Make sure to go back and pay the due amount in full whenever possible, so that you can bring your credit score back on track.

Does Credit Card Settlement Affect CIBIL Score - Related FAQs

Yes, settling your credit card bill is a bad idea and should be your last resort. It puts you in a negative light as when you don’t pay your dues in full.

It might take active work of 4-6 months to improve your credit score after settlement.

You cannot remove the entry of a genuine settlement from your credit report. The only way to remove it is to pay the amount in full, and change its status to ‘closed’ from ‘settled’.

A credit card settlement can knock off 75-100 points from your CIBIL score at once.

Yes, you can approach your credit card vendor whenever you are ready to pay your dues in full after a settlement. 

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