Credit card has become an essential financial tool in today’s fast-paced life. But sometimes due to excessive spending or not being able to pay on time, it becomes difficult for the cardholder to repay his dues. In such a situation, some people choose the option of Credit Card Settlement, in which the account is closed by paying some amount by agreeing with the bank.
Although this option gives immediate relief, it can cause many problems in the future. The first and biggest impact is on your CIBIL score, which is the most important criterion for taking any type of loan. As soon as the tag of “settled” is added to your credit report, banks or NBFCs start looking at your loan application with suspicion.
Apart from this, many times banks refuse to give loans or offer loans at a higher interest rate. At the same time, conditions like additional documents, demand for a co-guarantor, or a limited loan amount can also come up. Therefore, Card Settlement should be adopted only as a last option.
Nowadays, everyone uses a credit card. It is not only convenient, but also helps immediately when there is a sudden need for money. But sometimes, due to excessive spending or not being able to pay on time, the outstanding credit card keeps increasing. When the debt increases so much that it becomes difficult to repay it, people often opt for a Credit Card Settlement. That is, an agreement is made with the bank to close the account by paying some amount from the total outstanding.
Although this method sounds easy and relieving, it is very important to understand the problems hidden behind it. Especially when you are planning to take another loan in the future – be it a home loan, car loan or personal loan.
First of all, it is important to know that card settlement is considered a kind of default. Banks or financial institutions see it in such a way that the customer did not pay the entire outstanding amount and fulfilled their obligation by making a settlement. This has a direct impact on your CIBIL Score and Credit Report. And as we know, your CIBIL score plays a very important role in getting approval for any loan.
In today’s article, we will know in detail what kind of difficulties can arise in taking a loan after card settlement, what effect it has on your credit profile, and how you can get out of these difficulties. If you are also thinking of applying for a loan in the future and have ever settled a card before, then this information can prove to be very useful for you.
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 Card Settlement.
The following are some of its main features:
Below are some common reasons:
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. |
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
2. Address Proof
3. Income Proof
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.
Below are some steps that should be followed before a Credit Card Settlement:
The process of Credit Card Settlement is explained below in simple terms:
A settlement can hurt your credit score. The impact can be seen in the following ways:
Let us learn in detail about how Credit Card Settlement affects your credit score, loan approval, and interest rates.
1. Effect on credit score
Every time you pay your credit card instead of paying the full dues, it is marked in the credit report as “Settled”. This indicates that you have not paid back the full amount to the bank, which lowers your CIBIL score (Credit Score). A low credit score may cause problems in availing a loan in the future.
2. Problem with loan approval
When you go for a home loan, car loan, or personal loan from a bank or NBFC, they initially verify your credit score and credit report. If there is an entry of settlement in your report, the bank might consider you a “Risky Borrower” and deny lending you a loan.
3. The interest rate can be high
Even if you get a loan in some way or another, the bank can extend a loan with a high interest rate. That is because the bank believes you have not been paying in entirety previously, increasing their risk factor.
4. Credit card limit reduction
Once your credit card is settled, banks and financial institutions can refuse to issue you a new credit card limit or cut down your current limit. This can land you in trouble while using a large number of credit cards in the future.
5. Effect on other financial services as well
Not only loans but also credit card upgrades, overdraft facilities, EMI options, and other financial products can be impacted. Pre-approved loans and offers are not provided by most banks to those customers who have a history of settlement in their credit reports.
It has many benefits, which are as follows:
It has many disadvantages, which are as follows:
In conclusion, Credit Card settlements can be a temporary solution, but their long-term effects can prove to be quite serious. When you are unable to pay your credit card dues in full for some reason and settle with the bank, it becomes a kind of “blemish in credit history” for you. This blemish can become a hindrance for you in implementing new financial plans in the future, especially when you are thinking of taking a home loan, personal loan, or car loan.
Along with this, it is also important to understand that banks and financial institutions decide whether you are a reliable borrower or not based on your CIBIL score and credit report. And when a word like “settled” appears in your record, their trust may waver. Therefore, it can be said that while doing a credit card settlement does provide relief for some time, its long-term consequences cannot be avoided.
However, the good thing is that it is also possible to improve the situation. If you improve your credit habits over time, take small loans and pay them on time, and fulfill new credit responsibilities properly, then gradually your CIBIL score can be strengthened again. Apart from this, you can try to clarify the old settlement by writing a letter to CIBIL, or change “settled” to “closed” by paying the entire outstanding amount – this can also be a positive step.
Que: Can I get a new credit card even after the settlement?
Ans: This can be difficult. Many banks avoid giving credit cards after settlement or provide very low credit limits.
Que: For how many years does the settlement entry remain in the credit report?
Ans: The settlement entry can remain in your credit report for up to 7 years, which can make it difficult to get a loan or credit card during this time.
Que: Can the bank ask me for the remaining amount even after the settlement?
Ans: No, once the settlement is done, the bank will not bother you for the remaining amount. But it hurts your credit report.
Que: Will my credit score be affected by doing a Credit Card Settlement?
Ans: Yes, when you settle, it is recorded as “Settled” in your credit report, which may reduce your credit score (CIBIL Score) and may cause difficulty in getting a loan in the future.
Que: Can I take a loan in the future after the settlement?
Ans: It may be difficult to get a loan after the settlement. Banks may consider you a “High-Risk Borrower” by looking at your credit history and may refuse to give a loan or give a loan at a higher interest rate.
Founded in 2015, Ahk Tips is a New Delhi-based financial advisor specializing in debt relief and loan management solutions.
