Credit Card Settlement Process and Its Impact on Credit Score

Inevitable financial hurdles can prevent you from leading a healthy lifestyle. Those mounting debts and added interests might take a U-turn in your lifestyle. As a result, the next time you apply for a personal loan, your bad CIBIL score restricts your application from getting approved.

Your reason for not being able to pay the debt or outstanding balance on time can vary from one individual to another.

That’s where the discussion of credit card settlement comes in. Here, you will learn how to settle your credit card on time. You can also get a brief understanding of how it impacts your credit score. So, let’s get started.

When Would You Consider ‘Credit Card Settlement’?

Credit card bills are a type of unsecured loan that can impact your credit report negatively. Your credit report consists of numbers that summarise your credit history. It lets your lender assess your loan eligibility.

So, if you fall behind on your credit card payment, your lender performs a hard inquiry and discovers your CIBIL report. A person with bad credit will have less chance of getting their loan application approved.

Sometimes, you might require an instant personal loan for wedding or educational purposes (to mention a few circumstances). In those instances, your lender finds out your credit report and rejects the loan application or increases the interest rate.

Falling behind a credit card payment will result in financial struggles. You may consider a credit card settlement if you have landed into debt and find it difficult to clear your pending dues.

A Brief on Credit Card Settlement

A settlement in credit cards is a mutual agreement that occurs between you and your card issuer or bank. It lets cardholders manage their finances when they cannot pay their debts on time. Not paying the debt may increase the interest rate.

As a result, Rs. 10000 – 12,000 of debt might turn into lakhs by the end of one fiscal year. It becomes burdensome for a cardholder to pay the outstanding balance. In such circumstances, a settlement can save you. The credit manager asks the cardholder to pay a certain amount to complete their settlement process.

This process lets the lender agree to forgive the portion of the debt in comparison to the promise that you paid the rest. It might be the last option to consider, but it can increase your chances for a personal loan.

Suppose your overdue amount is Rs. 100000, and you approach to pay Rs. 50,000. The credit card issuer might forgive and remove the outstanding debt in exchange for this one-time payment. The reason why the creditor does this is:

• Either they need cash or
• They fear that you won’t repay the amount

Note that the percentage for settling credit cards is based on the issuer and cardholder’s ability to negotiate. It’s solely for extremely rare cases where cardholders are unable to make the payment.

Benefits of Credit Card Settlement

Struggling with unpaid credit card bills can make you feel stuck. Interest keeps growing. Bills keep piling. Life becomes difficult. That is where credit card settlement process can help. It gives you a chance to control your finances again.

Here are the benefits:

1. Credit relief in tough financial conditions

2. Helps avoid continuous late payment charges

3. Reduces mental pressure from growing debts

How does Credit Card Settlement Work?

It is important to know how to do credit card settlement. This helps you avoid mistakes while managing your payments and planning ahead.

1. Negotiating with the Provider -Talk to your bank or credit card provider directly. Request a settlement based on your current ability to pay. Here, you need to provide evidence showing that the issuer is in a difficult situation. Negotiation helps change the debt so that the cardholder can pay the amount comfortably.

2. One Time Payment -The borrower pays the balance in a one-time lower payment. This clears your account without needing full repayment.

3. Closing the Account -After settlement, your credit card account may be closed. This avoids further interest or usage on that card.

4. Credit Score Impact - The credit card settlement process affects your credit score. It shows you paid less than the total balance.

Given below is the credit card settlement process explained.

Outlining the Steps Involved in the Credit Card Settlement Process

Asettlement in credit cards involves repayment of the outstanding balance via credit cards. Every month, your credit card issuer generates a statement including your transactions, due dates, outstanding balance, and minimum payments.

As a cardholder, you must pay by the mentioned due date. Any payment failure incurs interest charges and late fees. A cardholder can make the minimum payment or pay the whole amount. When you choose minimum payment, it results in added interest in your remaining balance.

Interest will be added if you don’t pay the outstanding balance by the due date. Your credit limit has a critical role to play. When it exceeds the limit, it includes additional charges. So, if you have fallen into debt, it’s time to undertake the following steps for credit card settlement:

Step 1: Consult Your Credit Card Issuer

You may consult your credit card issuer and request a settlement. In certain instances, your credit card issuer or company might contact you for a settlement. Whichever way you choose, ensure that you discuss everything with the issuer before choosing a settlement in credit cards.

You might also negotiate with the issuer. On certain occasions, cardholders may also reach out to a legal advisor for better negotiations.

Step 2: Acceptance of the Settlement Proposal

In case you reached out to your card issuer, you need to accept the settlement. The credit manager decides on this depending on certain parameters and circumstances.

Usually, a credit card company rejects the settlement if you have the debt to repay in full. If your debt was less and the charges increased due to interest rates, your settlement proposal might get accepted.

Step 3: Discussing the Settlement Amount

You must discuss the amount after your credit card company accepts your settlement. Here, you must negotiate and settle to repay the amount as discussed.

Step 4: A Written Declaration

The next step involves giving a written declaration that you and your card provider have settled the dues. That will help avoid forthcoming legal issues that might hinder shortly.

What are some other ways to deal with growing credit card debt?

Now you know what is credit card settlement process. If your dues are rising, and you're worried, you can try some other ways to manage better.

1. Take a personal loan to repay the high-interest card dues quickly.

2. Switch the balance to another card offering lower interest with a balance transfer option.

3. Sell off any fixed deposits or mutual funds to pay off your dues.

Alternatives to Credit Card Settlement

Sometimes, settlement is not the only way. You may handle your dues using other possible solutions instead.

1. Borrow money from any long-term assets you own, like mutual funds or fixed deposits
2. Get the balance transfer facility from another provider. This way, you can benefit from interest-free periods
3. Sell your items and use that money for repayment to clear the credit card balance
4. Request payment help from friends or family, or use your budgeting strategies to check new passive income sources 
5. Take advantage of a flexible repayment plan to manage your debt accordingly

How refunds are processed?

In case of a duplicate or excess payment, you may receive a refund through this simple method.

Here is the complete process:

1. The issuer verifies your payment status, or the person places the return, and it is sent to the retailer

2. They confirm the amount paid & the refund gets initiated

3. Refund gets processed within 7-14 days

4. A message confirms when the refund is sent & earned points or rewards get debited (if any)

So, the customer should understand how the interest rate and fees work for credit cards. Customers should clear the amount without any defaults. They should learn the entire process for credit card settlements to make the right decisions in the future.

Does Credit Card Settlement Affect Your Credit Score?

If you settle a credit card debt, does it affect your credit score? Settled debts are always better than unpaid ones. After all, it allows you to reorganise your finances and build your credit score. However, credit card settlement can lower your credit score by 100 points or less.

How much settling credit cards affects your CIBIL score depends on where you will finance at one period. Your account might become delinquent if you fail to make the payment within 30 days of your due date. Missing out on several payments causes the account to be in default.

Note that a large debt balance can have a bigger impact on the CIBIL score. Individuals with a high credit score might suffer a massive drop in their score due to credit card settlement.

However, it’s always better for your future lender to know that you made the settlement rather than leaving the outstanding balance unpaid.

If you think you will be using the credit card for several purposes in the future, it’s better to choose an instant personal loan to clear your dues. You may consider a balance transfer option for a higher interest rate and switch to another credit card.

But if there are no other options left, you can perform these strategies to improve your credit score after settling credit cards:

1. Pay all your bills in a timely manner
2. Never live only on your credit (you may use 30% or less of the available credit)
3. Always review your credit reports from credit bureaus
4. Follow good financial habits each time you make a credit card payment

How to use a Credit Card wisely?

The process of credit card settlement lets you get concessions on your outstanding card dues only when you agree to the repayment of the entire amount at one go. Use your credit card only when needed. Always pay full dues on time. Keep spending below your credit limit. Otherwise, it may negatively impact the credit score.

Credit Card Settlement: Is It the Right Choice?

The credit card settlement process is only helpful when your debt is large, and you cannot repay it fully. 

It may offer financial relief for a short time. However, it lowers your credit score and may affect your future loan approvals. 

If you still have some repayment ability, try other options like a personal loan or balance transfer. Choose a settlement only when no other method works. 

It should be your last option when you are under serious financial stress. Always talk to your issuer first before making any move.

Finally

A credit card settlement process lets you reduce or eliminate your outstanding dues. However, it may also impact the credit score negatively. Thus, credit card settlement might be your last option, especially when you face massive financial complexities.

Settling credit cards might also impact your forthcoming creditworthiness, besides your CIBIL score. So, before you settle, you should always explore other choices. Now, you have understood how a settlement can impact your credit score. So, you can make your final decision accordingly.

Frequently Asked Questions (FAQs)

Q.1. How is interest calculated in a credit card settlement?

Interest stops once your settlement offer is accepted. Till then, the issuer may keep adding interest on the pending balance. The issuer checks how long the dues have stayed unpaid and calculates the amount. The final settled figure may include part of that interest, depending on what both parties agree to in writing.

Q.2. What happens after settling a credit card debt?

Once the credit card settlement process is completed, the account gets marked as "settled" on your credit report. This entry shows you paid less than the full amount. It stays in your report for a few years. Your credit score may drop, and getting fresh loans or credit cards could be harder for some time.

Q.3. When should you consider settling a credit card debt?

Use the credit card settlement process only if you cannot pay even the minimum dues for months. If your income has dropped or a medical issue prevents you from repaying, a settlement might help. It is not for regular delays. It is for times when you cannot repay despite trying everything else available.

Q.4. What percentage of the debt do credit card companies typically agree to settle for?

Credit card companies usually settle for 30% to 70% of the total dues. The credit card settlement percentage depends on your repayment history, total balance, as well as your conversation with the issuer. If they feel you truly cannot pay the full amount, they may accept a lower amount. 

Q.5. Can you recover your credit score after settling a credit card debt?

Yes, you can improve your credit score after a settlement. Start by paying all your bills on time. Avoid using full credit limits. Keep checking your credit reports for any errors. These steps help your score recover. Using credit cards and loans responsibly helps you improve your credit history again.

Q.6. Is it wise to settle a credit card debt?

It can be wise only if you have no other way to repay. If you're facing job loss or heavy debt, it helps avoid legal trouble. But it affects your credit score badly. Before choosing this step, always try other ways, like balance transfer or loans. Use settlement as your last resort.

Q.7. What are the steps involved in a credit card settlement?

First, contact your issuer and explain your problem. Next, ask for a settlement offer. If they agree, negotiate the amount and get it confirmed in writing. Once done, pay as agreed. Always ask for a credit card settlement letter to avoid future disputes and confirm the closure of the account.