A credit card settlement can be a lifeline for people in debt trouble as it allows them to settle overwhelming debt by paying only a fraction of what they owe. It may seem like a good option, but settling a credit card debt has consequences that reflect on your financial profile, credit score, and borrowing in the future. Hence, before settling on settlement as your debt resolution strategy, the full extent of consequences needs to be known.
This article describes the implications of credit card settlement in India, impact on your credit profile, potential obstacles in accessing future credit, and ways to recover.
Credit card loan settlement refers to the process whereby the owner of the credit card bargains with the bank or credit card company to pay some part of the debt in case Person is unable to pay the total amount. The bank consents to accept a sum of money, which reflects that the debt is “settled” rather than “paid in full.”
Credit card settlement is usually provided as an option to Indian borrowers who are financially strained. It provides some form of relief because it lightens the burden of debt but should be understood that settlement is not the same as full debt repayment.
Settlement with the bank can be agreed upon where the bank feels that a risk of not recovering the full amount exists. That is why banks may feel that settlement is better than continuing into default.
By paying a credit card debt settlement, it will surely show against your credit history. So in India, CIBIL or credit information companies put such settled accounts in “Settled” instead of “Fully Paid”. This can act like a bad remark for all your credit profiles since you hadn’t really repaid the borrowed amount.
A settled account also negatively affects your credit score, decreasing it by a few points. This decline can also result in more difficulties getting any future loans and credits because the lenders view settled accounts as a sign of financial distress.
Once settled, obtaining a new credit card or loan becomes tough, because the creditors view him/her as a high-risk debtor. The bank might set tighter terms and conditions or raise interest rates on applications and might refuse an application outright.
Settlement of debts may come with legal clauses that limit further action against you, but failure to observe the settlement terms may attract renewed collection efforts or legal actions from the bank.
This could mean fees for the preparation, processing, and whatever penalty a bank may impose during settlement. While the figure is usually lower than that which would appear as the outstanding balance, such surcharges tend to be accumulative.
The settlement of a credit card account has an immediate adverse effect on your creditworthiness, as indicated by your credit score. Here is how settlement affects your credit profile:
Credit card settlement in India may also restrict future borrowing capacity. This is because:
In India, this forgiven portion of a settled debt may be considering as taxable income, depending upon the policy of the bank. This means you would have to pay income tax on the amount the bank writes off. It would be advisable to consult with a tax advisor if one is concerned about the tax implications of a settlement, so they can clarify how much, if any, Person will owe in taxes.
Rebuilding your credit score after settlement is quite important to improve your financial health. Here are some effective ways:
A settlement is essentially a credit card settlement. That’s quite a practical way out in case one cannot handle debt; yet it has many severe implications attached. From reducing a person’s credit score to even severely limiting his future borrowings, settlement implies long-term effects after just eliminating his immediate debts.
Once you settle a debt, it is quite possible to seek to reinstate the credit profile by having responsible financial habits and keep checking your credit report. And with time and rectified financial discipline, you will be able to regain your creditworthiness in India.
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Que: Is credit card settlement a good idea in India?
Ans: Credit card settlement can provide relief if you’re struggling financially, but it comes with repercussions like a lower credit score and difficulty accessing future credit. It’s a good option only if all other alternatives are exhausting.
Que: How long does the “Settled” mark stay on my credit report?
Ans: In India, a settled account can remain on your CIBIL report for up to seven years, affecting your credit score and future borrowing capacity.
Que: Will I be eligible for a loan after settling a credit card debt?
Ans: Yes, but eligibility may be limited initially, and you may face higher interest rates or stricter terms until your credit profile improves.
Que: Can I negotiate a better settlement amount?
Ans: Yes, you can negotiate with your lender to lower the settlement amount based on your financial situation. Many banks are willing to negotiate rather than risk a total default.
Que: Are there alternative options to settlement?
Ans: Yes, alternatives include restructuring the debt, debt consolidation, or seeking a balance transfer. Each option has its own terms and consequences, so consider them carefully.
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Founded in 2015, Ahk Tips is a New Delhi-based financial advisor specializing in debt relief and loan management solutions.
