How to Improve Credit Card Score After Loan Settlement

What is Loan Settlement?

Loan Settlement essentially refers to the process of resolving delinquent debt for less than the outstanding amount by promising the lender a substantial lump-sum payment.. The One-time Settlement offer is usually made by the bank after six months of non-payment of dues. In most cases, the principal amount is repaid, and the interest is waived off. While this may sound like an easy way of getting rid of the loan, it takes a lot of requesting and official paperwork for the settlement to ultimately come through. Furthermore, your credit score is also affected adversely for years.

What is the Loan Settlement Process in India?

The loan settlement process is also known as the loan defaulter settlement in India. It refers to an agreement which is made between the lending bank and the borrower, wherein the loan is ‘settled’ by repaying only a part of the outstanding amount.

This settlement amount is decided based on various considerations such as the reason for non-payment of dues, the paying capacity of the borrower, the number of unpaid EMIs, etc. If the creditor bank is convinced about the genuineness of the borrower’s reason for non-payment, it forgoes a part of the debt in order to assist the borrower in repaying the loan – at least partially. In extreme cases, even a part of the principal amount is waived off. After the borrower accepts the conditions of the one-time settlement and the process is complete, the loan account is closed and marked ‘settled’.

The Effect of One-Time Settlement on Your Credit Score

While a one-time settlement may seem like the most convenient solution, it has an adverse effect on your credit score and, thereby, your borrowing capacity that can last for years. Once the creditor bank closes the account and records it as ‘settled’, the same information is communicated to the Credit Information Bureau of India Limited (CIBIL). The ‘settled’ loan accounts are deemed as negative credit behaviour. It makes the credit score of the borrower drop by 75-100 points, depending upon the number of unpaid dues.

This is why experts suggest that a one-time settlement should be your last resort for waiving the loan. The reason why most people fall for this option is that they are not aware of the other options, and the pressure from the creditor bank can be very intimidating at times. Therefore, the first and most important thing in such a situation is to keep your cool or it can land you in a mess.

How to Improve Your Credit Score After Loan Settlement?

1. Pay in small regular amounts

For any credit that you take, you should keep repaying the amount in small increments at regular intervals. This considerably helps to distribute the credit burden over a period of time and safeguards you from a situation where you have to pay a lump sum amount of money.

2. Regularly scrutinise your Credit Utilization Ratio

Experts suggest that you should never use the whole portion of credit unless it is unavoidable. For instance, if your credit card limit is 10,000, you should ideally use only 30-40% of the amount. Smart and calculated utilisation of credit projects you as a financially responsible borrower, and therefore improves your creditworthiness considerably.

3. Avoid making frequent credit enquiries

You should refrain from making credit enquiries unless it is very important. Too many inquiries can give an impression of an unbalanced financial state, which affects your creditworthiness adversely. In India, CIBIL reduces credit scores if an individual makes too many credit enquiries. Therefore, you should limit the frequency to just 3-4 times a month.

4. Regularly track your credit reports

Tracking your credit score is easier than before, with so many applications available for the same. Experts suggest that you should regularly track your CIBIL score to ensure that all your details are correct and updated. This helps to keep a check on any kind of discrepancy.

Final Words

Loan settlement makes your creditworthiness drop considerably. Therefore, you should plan your credit well and try to avoid the situation of a settlement at all costs. However, this could become unavoidable at times.

In such a situation, always take advice and help from experts who know the technical nuances of banking operations and loan settlement procedures. In India, Freed is one such company that has a team of skilled professionals who can ensure a smooth loan settlement process for you.