An essential factor that aids lenders in verifying applicants’ creditworthiness is a high CIBIL score. Naturally, if you want to receive financial aid on favourable conditions, you need to have a good score. If it is impacted for any reason, it is essential to pay attention to it and take action to make improvements.
Your credit history may suffer as a result of your decision to settle your debt. Even while a loan settlement may have reduced your financial load, its repercussions may limit your ability to get finance in the future. In this post, we’ll explain how to handle a similar circumstance and raise your credit score after paying off your debt.
When things get out of hand and you find it difficult to make loan payments, your lender could offer you an alternative to a One Time Settlement (OTS).
What is A Debt Settlement?
In a loan settlement, the remaining loan principle and interest are resolved by returning a smaller quantity as a last-ditch effort to terminate the account. The loan is often paid off at the principle amount, and any owed interest is waived by the lender.
In the majority of settlement instances, the lender settles the loan for its whole principle amount and totally forgoes any accrued interest. The credit agency records the settlement as a loss since the lender suffers a loss as a result, which eventually lowers your credit score.
How does your Credit Report change after a Debt Settlement?
But when a loan account is settled, the lender suffers a financial loss; as a result, they write off the amount that was waived off and record it as a loss. The Credit Bureau would receive the same information.
Thus, a debt settlement shows up unfavourably on your credit record. Your ability to obtain a fresh loan in the future will be ruined by any poor history in your report, which will remain on your record for 7 years. Additionally, the lender could put you on their bank’s or financial institution’s “blacklist” for any future transactions. Therefore, before deciding to accept the lender’s offer, you should carefully define your terms.
1. Pay off your debt in full and change your status from “Settled” to “Closed”
If you have reached a settlement with the credit card company, it is advised to do so. Your credit score is nevertheless negatively impacted by a “Settled” status since it indicates that you have not fully paid your debts. Talk to your credit card provider and come to a mutually agreeable sum that will enable you to change your account’s status to “Closed” depending on your income and affordability. Your credit score will significantly benefit from this.
Don’t request credit frequently; doing so might indicate an imbalanced financial situation, which hurts your rating. The credit agency also lowers ratings according on the quantity of enquiries. As a result, its frequency must not exceed three to four times each month.
2. Manage your Credit Cards
Too many cards can sometimes be detrimental. It might happen that a card that is lying around and is no longer being used results in a default payment for yearly fees and a black mark on your report.
Therefore, you must examine all previous cards and, if possible, close those that you no longer need. Keep the oldest card with a solid history, nevertheless. For improving future credit, a lengthy and positive past is particularly beneficial.
3. Pay your Bills on time
Nearly one-third of your credit score is determined by your payback history, which is a crucial element. Making all of your loan and credit card payments on time and in full, beginning immediately, is one of the most efficient strategies to restore your credit score. Your score will be significantly and immediately impacted by this. To be able to make full payments, you might need to limit your expenditures, but the improvement to your credit score will be well worth it.
4. Don’t go over 50% of your Credit Limit
The quantity of credit you have accessible on your accounts is another aspect that affects your credit score. Make sure you don’t utilise more than 50% of the credit limit that has been given to you. Spend no more than Rs. 25,000 per month on your card, for instance, if your credit limit is Rs. 50,000. Anything more shows that you lack financial restraint and are “hungry” for borrowing. Your score will be impacted negatively by this. Make sure you don’t go over 50% of your limit to increase your score.
5. Check your credit score online by monitoring your CIBIL reports
You must confirm that your name, PAN number, birthdate, and other details are accurate, and you must let the credit bureau know if there are any inaccuracies. This step could assist raise your scores if they have previously declined as a result of an error.
6. Pay off any Outstanding Debts
Any balance on your credit card or loan has a significant negative impact on your credit score. Even though it could first appear challenging to come up with the cash to pay them all off, it is a good idea to bargain with each of your lenders to attempt to come to an agreement on a sum to pay off all your obligations.
7. Create a Positive History
The first piece of information a lender would look at to determine if you qualify for a loan is your credit report. Therefore, you must make sure that you create some positive history and erase the negative past that was mentioned in the report. From this point forward, make sure to pay all of your credit card bills and EMIs in full before the due date. Paying your monthly instalments on time raises your credit score quickly.