What are your legal rights during a credit card settlement?

What are your legal rights during a credit card settlement?

Summary

Credit card settlement is an option that comes up when the cardholder is unable to pay their dues on time for some reason. In this situation, the bank allows the customer to close the account on the basis of partial payment, which is called “settlement”. Although this option provides immediate relief, there are many legal and financial aspects hidden behind it that are very important to understand.

During the settlement process, the consumer has many legal rights, such as the expectation of respectful behavior from the recovery agent, timely contact, the right to ask for written proof of settlement from the bank, and the right to file a complaint with the Banking Ombudsman. Apart from this, the customer also has the right to oppose any kind of unethical or illegal recovery.

Settlement has a direct impact on the customer’s credit score and CIBIL report, which may cause problems in taking a loan or credit in the future. Therefore, it is important to be fully informed and cautious while making this decision. The customer should get all the documents in writing and keep a record of every conversation.

Introduction

In today’s era, credit cards not only make our shopping and payment process easy, but they have also become a symbol of our financial freedom. However, sometimes due to excessive expenditure, we are unable to pay our credit card on time. In such a situation, the outstanding amount keeps increasing, and ultimately, the matter reaches credit card settlement. But in this process, many consumers unknowingly ignore their rights, due to which they have to suffer financial and mental loss.

That is why it becomes very important to know what your legal rights are during the settlement process. Because only an aware consumer can protect themselves from misbehavior, illegal recovery, and mental harassment. Whenever a person becomes unable to pay his credit card, the bank or credit card company gives him the option of settlement, in which the matter can be ended by making a partial payment instead of the entire amount.

In addition, when you go on the path of settlement, sometimes the behavior of recovery agents can be uncomfortable or even illegal. Some cases, these agents violate your rights by using mental pressure, threat, or calling at unusual times.

In today’s article, we will discuss in detail what legal rights you should be aware of during credit card settlement, in which circumstances you should be cautious, and how you can protect your interests by playing the role of an aware consumer.

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 a Credit Card Settlement.

What are the features of Credit Card Settlement?

The following are some of its main features:

• The process of Credit 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 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 is the difference between a Personal Loan Settlement and a Credit Card Loan Settlement?

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.

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 a 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 behaviour 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.

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.

What is the Credit Card Settlement Process?

The process of Credit Card 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 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.

How to settle your credit card without spoiling your credit score?

A credit card is a very useful financial tool, but if not used properly, it can also lead to heavy debt. Many times, people have trouble paying credit card dues due to financial difficulties. In such a situation, credit card settlement can be an option, but it often hurts the credit score.

However, by adopting some smart methods, you can settle your credit card without spoiling your credit score. Let us understand in detail how you can settle the credit card dues properly and keep your credit score safe.

Methods of credit card settlement without spoiling the credit score

(i) Discuss the repayment plan with the bank

If you are unable to repay the credit card dues in one go, then you can ask for an EMI or repayment plan from the bank. Many banks offer their customers the option of repayment under flexible payment terms, which allows you to pay gradually, and your credit score is also not affected.

(ii) Choose the option of balance transfer

If you have more than one credit card, you can transfer the balance to a credit card with a lower interest rate. This will help you avoid high interest and repay your debt gradually.

(iii) Pay by taking a loan

If your credit score is good, you can pay off the credit card by taking a personal loan. Usually, the interest rate of a personal loan is lower than that of a credit card, which can give you financial relief.

(iv) Negotiate with the bank

If your financial situation is bad and you cannot pay a lump sum, try to negotiate with the bank. Some banks offer customers flexible payment options instead of “lump sum settlement”, which keeps your credit score safe.

How to improve CIBIL score after credit card settlement?

10 best ways to improve CIBIL score after credit card settlement:

1. Check the CIBIL report carefully

Before starting the process of improving your credit score, you should check your CIBIL report thoroughly. For this, you can download your report from the official website of CIBIL.

• Check if there is any wrong information in your report.
• If there is any mistake, report it to CIBIL to correct it.

2. Change the settlement status to ‘Closed’

When you get a credit card settlement, the bank reports it as “Settled”. This status hurts your credit score.

• You can request that the bank update it to “Closed”.
• If possible, change it to “Fully Paid” by paying the remaining amount.

3. Make all payments on time

The most important thing to improve your credit score is to make timely payments.

• Pay all your loans and credit card EMIs on time.
• If there are any old dues left, clear them as soon as possible.

4. Get a new credit card and use it responsibly

If your credit score is not too bad, you can get a low-limit credit card and use it properly.

• Make small expenses every month and pay the entire bill on time.
• This will gradually improve your CIBIL score.

5. Keep the credit utilization ratio below 30%

• If your credit card limit is ₹1,00,000, try not to spend more than ₹30,000 every month.

• This shows that you are using your credit limit wisely.

What are the common mistakes related to Credit Card Settlement?

Below, we are discussing some common mistakes related to Credit Card Settlement in detail:

1. Considering settlement as a loan waiver

Many people think that after settlement, all their dues are forgiven. Whereas the truth is that the bank does forgive you some amount, but the remaining payment is recorded as “Settled” in the report, which negatively affects your CIBIL score.

2. Not taking the settlement agreement in writing

While settling, people rely only on phone calls or verbal conversations, but without written consent, this is a big risk. If you do not have a written document, then in the future, the bank can start recovering the dues against you again.

3. Not checking the CIBIL report

After the settlement, it is important that you check your CIBIL report and ensure whether the status, like “Settled” or “Paid,” is updated correctly or not. Many times, banks forget to update the report, which affects your credit history.

4. Settling without complete information

People often settle due to the words of the agent or due to fear, without understanding what its effects will be. Whereas they should first consider options like EMI restructuring, part-payment, or asking for time.

5. Settling immediately due to fear of the bank’s recovery agent

Many times, recovery agents threaten or intimidate on the phone, due to which people get scared and settle without thinking. Whereas you should be aware of your rights and not pay any amount without a written agreement.

Is Legal Credit Card Settlement?

In India, credit card settlement is a legal procedure accomplished by mutual agreement between the customer and the bank. This occurs when the client fails to pay the entire credit card debt; the bank works with him and waives off the remaining loan by deducting some sum. We know this as “settlement”.

Let us delve more to grasp it precisely:

How does the credit card settlement process go?

The bank or card issuing company gets in touch with a consumer when someone is late in paying the credit card debt. Should the customer’s financial situation be very dire and he is unable to pay the entire amount, the bank provides an alternative: closing the account with a lump sum one-time settlement. Usually, this sum is less than the principal value.

Does RBI know about this?

Indeed, if it is carried out under appropriate supervision and documentation process, RBI has let banks go for “One Time Settlement” (OTS) or “Loan Restructuring”. RBI also makes clear, nevertheless, that banks should verify client payment capability and settle only in circumstances of a genuine financial crisis.

But be aware:

• Your CIBIL score suffers in settlement.

• The credit record shows settlement as “Settled” or ” Written-Off,” which could cause issues obtaining a loan or credit card down the road.

• It is advisable to obtain a NOC (No Objection Certificate) from the bank even after settlement, so as to prevent future conflict. 

• When you have no other answer, settlement ought to be your last alternative.

How to get a Closure Letter from the Bank after Credit Card Settlement?

Here we will understand in detail how to get a Closure Letter from the Bank after settlement, as well as what things should be kept in mind.

Step-by-Step Process – How to get a Closure Letter:

1. Complete the settlement payment

First of all, make sure that you have paid the settlement amount decided with the bank in full and on time. If any installment is due, the bank will not give the Closure Letter.

2. Contact the bank

As soon as your settlement payment is completed, contact the bank’s customer care or credit card department. You should request that you be provided with a No Dues Certificate or Closure Letter in written form.

3. Send an email or a written application

After contacting the bank, you can send a written request through email or by post. Provide the following information in it:

• Your name
• Credit card number
• Date of settlement
• Amount paid
• Request that a closure letter be sent to you.

4. Keep the payment receipt

Proof of the last payment made by you (receipt or transaction ID) is very important. Scan it and attach it to the email.

5. Follow up

Sometimes the bank delays issuing the closure letter. So if there is no response within 7-10 working days, keep following up via phone/email.

6. Receive the closure letter

Once the bank accepts your request, it will send you the closure letter via email or post. Keep this letter safe.

What should be in the closure letter?

• Mention of your name and card number

• Confirmation of completion of payment

• Proper mention of no other dues

• Official signature and date from the bank

Why is a Closure Letter necessary?

• It is proof that you have fulfilled the terms of the settlement.

• This can help in updating your CIBIL report.

• If any bank asks for your dues in the future, you can show it.

• This proves your financial credibility while applying for a loan or credit card.

What if the bank is not giving the Closure Letter?

• You can file a complaint in the Grievance Redressal Cell of the bank.

• If no solution is found, a complaint can be made to the Banking Ombudsman.

Is it right or wrong to do a Credit Card Settlement?

Let us know whether it is right or wrong – let us understand from the balance.

When can it be right to do a Credit Card Settlement?

Relief in case of financial crisis:

If you have lost your job, the source of income has stopped due to illness, or there are other serious circumstances, then a settlement allows you to get rid of the debt to some extent.

Protection from legal action:

Through settlement, you can avoid court cases, troubles of recovery agents, and other legal actions.

Mental peace:

Constantly increasing interest and calls cause mental stress. Settlement can also provide mental relief.

When can it be wrong to do a Credit Card Settlement?

Bad impact on CIBIL score:

When you settle, the bank records it as “Settled” or “Written-off” in your CIBIL report. This drastically lowers your CIBIL score, which can make it difficult to get a loan or a credit card in the future.

Reduced financial credibility in the future:

Banks and NBFCs (Non-Banking Financial Companies) consider a person who has settled as risky and less trustworthy.

Hidden charges and terms:

Sometimes, certain additional charges or things like GST are not disclosed during settlement, which can create problems later.

So, what to do?

• Settlement should be the last resort, after you have exhausted all options (conversion to EMI, reduction in interest, moratorium on payment).

• If possible, repay your card amount gradually. This will not affect your CIBIL score, and your credit history will remain clean.

• Talk to the bank and find an honest solution – like a “Revised Payment Plan”.

What are the benefits of doing a Credit Card Settlement?

It has many benefits, which are as follows:

• Through Credit Card 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.

• Credit 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.

• Although Credit Card Settlement can affect the borrower’s credit score, by following the agreement on time and in the right manner, they can gradually improve their 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.

What are the disadvantages of doing a Credit Card Settlement?

It has many disadvantages, which are as follows:

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

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

• Due to Credit Card Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

• Through Credit 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.

• During a Credit Card Settlement, the agreement between the bank and the borrower contains many conditions. The borrower is required to follow these conditions, which may limit their freedom.

• After a Credit Card Settlement, the borrower’s credit score may be affected.

What are your legal rights during a credit card settlement?

1. Right to Consumer Protection

The Consumer Protection Act of India, 2019, gives you the right to protect yourself from any kind of unethical, deceptive, or coercive activities. If a bank or its agent threatens, insults, or mentally harasses you, you can file a complaint with the Consumer Forum.

2. Rights under the Fair Practice Code

RBI (Reserve Bank of India) has implemented a Fair Practice Code for all banks, which states that banks will behave fairly during recovery from customers. According to this:

• Recovery agents cannot call you before 7 am or after 7 pm.
• You cannot be physically or mentally harassed.
• Your privacy cannot be violated.
• Use of threatening, abusive, ve, or derogatory language is prohibited.

3. Right to talk to the recovery agent

You have the right to talk only to the recovery agent authorized by the bank. If an unknown person asks for money, you can ask for an authorized identity card from them. Also, you can keep the recording or written proof of the entire conversation with you.

4. Right to ask for written proof of settlement

You have the full right to take the settlement offer in writing from the bank, and if you make the payment, then take a No Dues Certificate or Settlement Letter in return.

5. Right to correct the CIBIL report

After the settlement, the bank can put entries like “Settled” or “Partially Settled” in your CIBIL report, which can lower your credit score.

Conclusion

It is very important to understand that credit card settlement is not only a financial process, but also a sensitive and legally necessary step. When a person is unable to pay his credit card dues on time, the bank gives him the option of settlement. This option sometimes seems to be a relief, but the risks and effects hidden behind it can also be serious. In such a situation, if you are fully aware of your rights, then you can not only avoid your financial loss, but can also get relief from mental stress.

Apart from this, it is also important to know that your silence or ignorance during the settlement can be used against you. So always be aware and raise your voice for your rights in the right way. As soon as a recovery agent contacts you, first confirm his identity and keep the conversation on record. Also, the terms of settlement should not be only verbal, but you should get written confirmation of everything. This eliminates the possibility of any dispute or re-demand in the future.

Similarly, it is very important to get a “No Dues Certificate” or “Settlement Letter” after settlement, so that no old dues are shown on you in the future. If the bank or agent misbehaves with you or incorrectly recovers the money, then you can take legal action against them. For this, you have options like the consumer court, the RBI banking ombudsman, and consulting a lawyer.

Frequently Asked Questions (FAQ’s)

Que: Does applying for loans repeatedly spoil the CIBIL score?

Ans: Yes. Applying for loans or credit cards repeatedly makes the bank think that you are financially weak, which can further worsen your CIBIL score.

Que: Can the CIBIL score be improved just by paying EMI?

Ans: Yes, if you pay all your loan and credit card EMIs on time, it helps in improving the CIBIL score.

Que: Does closing a credit card spoil the CIBIL score?

Ans: Yes, if you close your old credit card, your credit history may decrease, which can hurt your CIBIL score.

Que: How to check CIBIL score for free?

Ans: You can check your CIBIL score for free from the official website of CIBIL or some banks and finance apps like Paytm, Bajaj Finserv, PaisaBazaar, BankBazaar, etc.

Que: What to do if there is a mistake in the CIBIL report?

Ans: If there is a mistake in your CIBIL report, you can go to the official website of CIBIL and file a complaint in the “Dispute Resolution” section. CIBIL can correct the mistake by examining your complaint.