Know the Impact of Settled Status on Credit Report
Debtors frequently forget to keep track of their payback schedule, resulting in an increase in their credit score. Credit scores are important not only for determining your creditworthiness but also for gaining the ability to negotiate with lenders. A good credit score can often give you negotiation leverage. However, if your CIBIL statement shows that you have “settled” status, even a good rating may not help you secure loans in the future.
If the “settled” status is recorded in the credit score, it means that the borrower has paid a portion of the remaining loan balance and has settled the loan. The lending institution agrees to accept a payment amount that is less than the initial owing amount when the debt is settled. This predicament occurs when lending institutions lose money on a deal and the borrower is unable to pay his or her debts owing to a severe situational crisis. The “settled” status is deemed bad and diminishes the likelihood of future loan approval.
The Effects of Having a Settled Status on Credit Report
You may find yourself in a circumstance that prevents you from repaying your debt. In this instance, your banker may offer you the option of a one-time settlement, or the bank authority may suggest that you settle the loan, which would allow them to recover the principle and costs. While the latter choice may appear to alleviate your loan tension, it may have a negative impact on your credit score. The following is the effect of a settlement on your credit score:
- The CIBIL agency will be notified if the borrower’s debt is written off by the bank or lending institution.
- The settlement is view as a negative point by the CIBIL agency, which would classify it as “settle.”
- When a debt is declare paid, a few points are subtract from the credit score.
- The borrower’s credit score will decrease 70-100 points, and the CIBIL report will reflect this for the next seven years.
- Before making a loan, banks and lending institutions frequently look at your credit score. Any loan application from such a candidate is likely to be refuse if the record contains a report of settlement or non-payment.
- Lenders will be hesitant to give such a customer a loan in the future.
What can you do to avoid acquiring a settled status?
Even though this settlement may appear to relieve tension, it has a negative influence on the borrower’s credit score and decreases their future borrowing opportunities. So, if you don’t want to fall into this settlement trap, consider the following ideas:
Inadequate awareness: Because the borrowers are less educate about the settlement, they frequently make mistakes. They are unaware that this settlement has a significant negative impact on their credit score. It is critical for borrowers to understand the benefits and drawbacks of the settlement option before proceeding. Before signing the settlement agreement, it is recommend that you thoroughly read all of the terms and conditions. If you have any questions, you should contact your agent.
Another option: In extreme cases where the borrower is unable to repay the debts of loans or credit cards, banks may offer a one-time settlement solution, although this should only be use as a last resort. It’s one of the riskiest ways to pay off a debt. The borrower can instead choose from the following options:
- The borrower may request that the lender or banks extend the repayment period.
- Request that the interest be waive for a set amount of time, or otherwise,
- Request a loan from family and friends and avoid settlement by repaying the lenders’ debts.
- When taking out a loan, it is critical to have a backup plan. Even while banks will not ask for collateral, you should have one on hand in case of an emergency.
Experts frequently advise against opting for a one-time settlement or settle status because it will have a negative influence on your credit score. Borrowers should consider all available possibilities before making a sensible selection.