Home»Blog»Banking»What is Credit Card Settlement and Should You Opt for it?
What is Credit Card Settlement and Should You Opt for it?
9 November 2022
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.
What is 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.
What is the Credit Card Settlement Process?
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:
Approach your credit card lender and explain your inability to clear your dues. Express to them that you are open to negotiations. Lenders don’t easily entertain debt settlement requests, so be prepared to tail with multiple officials. Express to them that you are open to negotiations.
Make a formal request as a written request again, explaining why you cannot pay off your claims in full. Offer them a lump sum payment against the full settlement of the debt—for example, 50%.
It’s solely at the lender’s discretion to accept or reject your application.
If the issuer accepts the application, they may propose a repayment plan or settle your credit card obligations.
The lender reserves the right to decide the settlement amount based on their judgment of your financial condition and payment terms.
Does Credit Card Settlement affect Your Credit Score?
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.
Alternatives to Credit Card Settlement
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.
1. Transferring Balance from One Credit Card to Another
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.
2. Borrow Funds from Some other Source
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.
Ways to Avoid Credit Card Settlements
Try to abide by the following habits to avoid landing into such tricky situations:
Don’t opt for the “Pay minimum “option credit cards provide. Always clear your credit card bills at the end of each billing cycle to avoid being served with interest on the outstanding balance.
Limit your spending to 25-30% of your credit card limit, and avoid overspending because ultimately, you have to repay it.
Ask your lender to set up auto payments of credit card bills. Also, enable reminders and notifications for your bills.
Don’t wait for the last moment to clear your dues; if possible, pay in advance to rule out any possibility of interest being charged.
If you have huge outstanding debt on your credit card, request your lender to convert it into monthly installments.
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.
Q1. What is credit card settlement?
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.
Q2. How much time does it take to improve your CIBIL if it gets affected by credit card settlement?
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.
Q3. Is it okay to opt for a credit card settlement?
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.
Q4. Can I secure another credit facility after a credit card settlement?
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.
Q5. Is it possible to use another credit facility to pay off credit card dues?
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.
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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.
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