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Credit Card Settlement Process and Its Impact on Credit Score

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.

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.

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:

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

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.

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