The Truth About Settling Credit Card Dues

OK. You’re stuck with a substantial amount of dues on your credit card, which for whatever reason, you can’t seem to pay off. In your desperation, you look for ways to free yourself that debt trap and end up where a lot of people usually end up at: settling credit card dues. The initial details sound magical, almost too good to be true. You wonder why you hadn’t heard about it sooner.

Is it a trade secret the banks keep to make more money off their customers? Why don’t more people use it? It all sounds very easy : get in touch with your bank and end up paying much less than what you actually owe, in installments too. It definitely seems the best way out.

Or is it? Well of course not.

Before we start to understand the minutiae of settling credit card dues, let’s do away with the obvious – banks and financial institutions are in it for the money. They’re a business as any other and want to make profit. So why would they let you off easy by cutting down on the debt you owe them? No reasonable business is going to let go of the profit they could’ve made from without you having to, well, pay for the consequences.

What is ‘Settlement’?

Now that the obvious is out of the way, let’s look into the deal itself. Imagine you owe your bank Rs 2 lakh in credit card dues. You decide to talk things over with them and settle at paying a total of Rs 1 lakh only, either as one-time settlement (OTS) or in multiple easy installments. That’s just half the amount of debt you owe them in the first place. (The amount can be negotiated with your lender, but in most cases it is not less than the principal amount.)

The ‘settlement’ here means that the bank customer pays only a part of the overdues and the bank closes the credit card or loan account.

Impact of Settling Credit Card or Loan Dues?

But things don’t stop just there. After you’re through with the Settlement process, your credit card report will now have the word “Settled” in it (instead of ‘closed’). Although this word may sound unassuming and oh-so-innocent while you’re celebrating your new found freedom, it actually is a red flag that  puts approval of all your future loan applications at risk.

After the settlement, your banker writes off the difference between the actual amount due and amount paid by you from its books and reports it as a loss (written-off by the banker). Your bank will then report about this to CIBIL (Credit Information Bureau of India Limited).

If you decide to settle your credit card dues, your credit score declines which is an indicator of lower creditworthiness.  When a loan is termed settled, it is viewed as a negative credit behaviour and  your credit score might drop by around 75-100 points. The CIBIL may hold this record for over 7 years.

The credit score is a key component of your credit report and is a three digit number between 300 and 900 that represents your credit worthiness. The closer your score is to 900, the better your chances of being approved for debt instruments such as loans or a credit card.

The mark of “settlement” on your report actually affects your credit score negatively making it extremely difficult for you to get a loan from any lender. Lower creditworthiness is interpreted by lenders as a lower chance of repayment. Nobody wants to lend good money to a bad borrower it is as simple as that.

What’s the way out?

So what other options do you have to pay off that debt? You can try the traditional ways. Ask your relatives and friends for a soft loan, or with a certain amount of caution, apply for a personal loan or loan against property to find the money you need. You can also go for another type of secured loan, a gold loan that features minimal documentation.

Other options that you can pursue include conversion of the out standing balance into EMIs, transferring the balance to another credit card with a lower interest rate or a special interest rate offer to give you more time to make the payment. The common feature of all these options is that, they would not impact your credit score adversely to the extent that the settlement option might. 

After you have selected one of these options, swear to yourself to never make impulsive purchases again and cut up the said credit card, although you might have had genuine reasons like sickness or an emergency that pushed you into debt to begin with. It is advisable to start accumulating an ’emergency fund’ to meet any unforeseen expenses.

Taking a settlement on your credit card loan should be your absolute last resort. Unless you’re an 80 year-old with no use for loans in the future, but by that age you should probably be more responsible.

PaisaBazaar – a PolicyBazaar.com venture — is India’s largest online destination for all kinds of loans, credit cards, mutual funds and other financial products.

(Kindly note that Relakhs.com is not associated with Paisabazaar.com. This post is for information purposes only. This is a guest post and NOT a sponsored one. No monetary benefit has been received for publishing this article.)

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Post Published on 24-March-2016)