Credit cards let you spend money that is not yours, with an obligation to repay the credit. Incidental rewards, bonuses, cashbacks, ease-of-use, and discounts are some of the major reasons why consumers are attracted towards credit cards. It’s all good if you repay the money within the stipulated time; however, failing to meet your credit card bills in full can overburden you with debt. Considering credit card companies charge 30-40% interest on your credit card dues, the debt doubles every two months, and soon you are in the clutches of huge debts. In case the debt burden is taking a toll on you and you don’t have sufficient funds to clear pending credit card bills, your last resort could be opting for credit card settlement.
Credit card settlement is a mutual agreement between the credit card issuer and the borrower. Here, the borrower has defaulted in paying credit card dues to settle the debt at an amount less than the outstanding amount, where the borrower promises to pay a certain agreed amount. The lender forgives a specific portion of the debt if the borrower promises to pay the remaining.
Lenders take it as the last option to retrieve whatever they can when they reckon that the borrower might not be able to repay the entire sum and will have to write off the whole debt as a loss. Credit card debt settlement is considered in extreme cases when the borrower’s financial condition is bumpy owing to reckless credit card spending or other emergencies.
The lender reserves the right to decide the percentage at which the settlement is closed; generally, it depends on negotiations and the borrower’s financial condition.
Credit card companies advertise credit card settlement as a process to eliminate your pending debt for pennies. However, it isn’t as straightforward as it sounds. Here’s the process of settling credit card debt:
Also Read: 7 Benefits of Using a Credit Card: Pay And Get Rewarded!
Credit card settlement is a sign that you cannot manage your debts, and most lenders wouldn’t extend credit facilities to such borrowers. Credit card settlement could dent your CIBIL score and reduce it to a range where no lender would consider lending to you in the near future. Alternatively, they may lend to you but for very high-interest rates to cover the risk they have to take on the books.
India’s credit card settlement procedure is quite strict; the settlement records continue to reflect in your credit score for the next seven years.
Settlement of credit cards should be opted when you have run out of all viable options. It might ease your hardships in the short term but will surely give you pain in the long term.
You could opt for a credit card balance transfer in such situations. Meaning, you transfer your outstanding credit card debt to a low-fee, low-interest credit card and conveniently pay off your dues at a much lower cost. However, not all credit cards offer this facility.
However, this shouldn’t be made a practice and should be considered only when you are certain that you will arrange funds to clear the debt of your new credit card before the interest-free period ends.
If you are determined not to risk your credit score by opting for debt settlement, you can look for other sources of finance. Since credit cards charge huge interest rates ( sometimes above 40% ), paying off the credit card debts from the proceeds of any other credit facility will help you save on interest payable.
You can borrow a personal loan or a loan against property at much cheaper interest rates when compared to credit cards. Moreover, you’ll get a fresh period to clear your dues in EMI. If you are looking for a personal loan at competitive rates, download the Navi app and apply online for personal loans up to Rs 20 lakhs.
Try to abide by the following habits to avoid landing into such tricky situations:
Also Read: 10 Best Credit Cards For Online Shopping
Credit cards are a valuable financial asset, provided the user maintains financial discipline. Use credit cards only to that extent you are financially capable of repaying. At no point in time should your credit card expenses exceed your monthly income. Once caught in credit card debt, the huge interest rates that credit card lenders charge will only make it worse for you.
Credit card settlement should be reported only when you are out of options. It is an agreement to settle the debt at an amount less than the outstanding amount, subject to acceptance by the lender. It, however, very badly affects the borrower’s credit score. It’s only prudent for lenders to offer credit card settlement and retrieve whatever they can from an asset that will likely turn bad for them.
Ans: It’s an agreement between the credit card lender and the borrower to pay a certain mutually agreed lump sum amount in full settlement of pending credit card dues. The lender forgoes a portion of the debt if the borrower who defaults in repayments promises to pay a certain minimum amount.
Ans: It isn’t that once degraded, CIBILl cannot be improved. Suppose you continue to manage your credit obligations efficiently without skipping any EMI’S and billing cycles. In that case, you can expect your cibil score to bounce back to creditworthy levels in a couple of years. However, there’s no fixed time limit for that.
Ans: No, it’s not a healthy financial practice. You should opt for credit card settlements only in extreme situations when there’s no other way out. You might save on some portion of your outstanding debt, but your credit score receives a major hit when the issuer adds you to the defaulter’s list.
Ans: It’s almost impossible that any lender would consider your credit application because of the degradation caused to your credit score due to credit card settlement. The settlement will continue to reflect for seven years on your credit history. However, the damage could be undone provided you have healthy financial practices.
Ans: Yes, you can settle your credit card dues by securing fresh finance. It could be a personal loan, a loan against property, a gold loan, etc. Doing so would also allow you a fresh tenure to repay your recent obligation.
Before you go…
Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
What is a Solvency Certificate? – Format, Documents Required & How to Apply Online?What is a Solvency Certificate? A solvency certificate is a legal document furnishing the detail... Read More »
What is Merchant Banking – Services, Features, Functions and ExampleWhat is Merchant Banking? Merchant banking is a set of select banking and financial services off... Read More »
Automated Clearing House: Objectives, Types and ProcessAutomated Clearing House is an electronic fund transfer network that manages automatic and direct... Read More »
How to Redeem Credit Card Reward Points ?Credit Card Reward points are types of incentives that customers receive when they use a credit car... Read More »
What is Electronic Clearing Service (ECS) in Banking and How does it Work?What is Electronic Clearing Service (ECS)? Electronic Clearing Service (ECS) is a method of elec... Read More »
What are Credit Card Validators and How to Use them?What is a Credit Card Validator? A credit card validator is a tool that checks the validity of a... Read More »
What is Cash Management and How Does it Work?Managing available capital can make sure that a small business stays afloat. Cash management is an ... Read More »
What are Prepaid Expenses? – Definition, Examples, and Journal EntryPrepaid expenses represent payments made in advance for products or services expected to be incurre... Read More »
Increase Credit Card Limit – Important Tips and How to Do It?The credit card limit is the maximum amount of money you can spend using your credit card. Your cre... Read More »
How to Detect and Protect Yourself Form Credit Card Fraud?What is a Credit Card Fraud? The unauthorised use of another person's credit card information to... Read More »
How to Cancel or Close Credit Card – Format and Helpline NumberCredit card users spend 40 times more than debit card users, as per RBI data. Having a credit card ... Read More »
What is Basis Point: Recent Increase, Formula and CalculationA basis point is a standard metric to measure changes in interest rates, yields from financial secu... Read More »
Top 10 Chit Fund Schemes in India in 2023Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »
10 Best Gold ETFs in India to Invest in March 2023Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »
10 Best Demat Accounts in India for Beginners in 2023Creation of Demat accounts revolutionised the way trades were conducted at the stock exchanges.&nbs... Read More »
20 Best Index Funds to Invest in India in March 2023What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »
Best Arbitrage Mutual Funds to Invest in India in March 2023Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »
10 Best SIP Plans in India to Invest in March 2023What is SIP? SIP or Systematic Investment Plan is a method of investing a fixed amount in ... Read More »
10 Best Corporate Bond Funds in India to Invest in March 2023Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »
10 Best Bank for Savings Account in India 2023 – With Interest RatesSavings account is a type of financial instrument offered by several banks. It lets you safely depo... Read More »