An individual may find himself to be stuck with a considerable amount of dues on their credit card that they find really difficult to pay off. In a desperate effort to be free of such a debt trap, many people look to one last resort – settling their credit card dues.
This option can seem very convenient and like some magical secret of settling credit card debt. You only have to pay a bank considerably less than what you owe, and that even in installments. But does this make it a good option?
Unfortunately, no. And it is important to clear this myth about settling credit card debt.
Before we understand the complexities of this, it is important to be clear on one thing. A bank and other financial institutions work towards one primary interest – which is to make a profit. So it wouldn’t make sense for them to allow you to pay a lesser amount to clear your credit card dues. Hence there is necessarily a consequence involved in going for settling.
Settlement – What it Means
Basically, in this process, an individual pays the bank a certain amount and the bank declares his/her dues to be ‘settled’. For e.g. a person owing Rs.4 lakh in credit card dues is asked to pay around Rs.2 lakh. This amount is either paid in one installment or in a number of easy monthly installments.
In this situation, ‘settlement’ means that the person pays just a part of the overdue and the bank closes the credit card or loan amount.
But things do not end here. Settling your dues can have serious long-term effects.
As a result of settling, your credit card report will now include the word ‘settled’. And this word becomes a red flag putting all your future home loans at a greater risk of rejection. Because after the settlement, the amount that a person did not reply to a bank, is recorded as a loss. This record is further reported to CIBIL (Credit Information Bureau of India Limited).
Consequently, a person’s credit score declines which serves as an indication of lower creditworthiness. That is, settling a loan is considered to be a negative credit behavior and may cause the credit score to decline by 75-100 points. It is worth noting that CIBIL may hold this record for a period of 7 years.
A lower credit score affects a lender’s assessment of a loan applicant, with a low score being interpreted as a lower chance of the person repaying the loan.
In order to pay off your debts, you may take a soft loan, i.e. consider borrowing from friends/family. Alternatively, you may also consider taking a personal loan or a loan against property. Another secured loan you can take with minimal documentation is a gold loan.
You may also consider converting the outstanding balance into EMIs or get the balance transferred to another credit card that has a lower/special interest rate that allows you more time to make the repayment. The benefit of these options is that it doesn’t affect your credit score as negatively as in the case of going for a settlement.
It is possible that there were a number of circumstances that pushed a person into debt and made them settles their credit card dues. But after going with one of the above-mentioned options, it is important that you make important changes to your financial habits, committing to never walk down such a path again.