The financial world can seem like a maze, and people often grapple with understanding the intricacies of credit scores and how different actions can affect them. This is true even for issues like loan settlements. So, if you have been wondering whether a loan settlement can affect your CIBIL Score, you are not alone. Yes, a loan settlement does have an impact on your CIBIL Score, but do not lose heart just yet! There are several ways to improve your credit score after a loan settlement.
The basics of loan settlement
Before you can understand loan settlement impact on CIBIL Scores, you need to understand what a loan settlement is. A loan settlement occurs when both you and your lender agree to close the loan before the end of its tenure. While this might seem like a convenient way to get rid of debt, it can leave a mark on your credit.
When a loan is settled, it is typically marked as such in your credit report, indicating that you did not repay the initially agreed-upon amount in full. This ‘Settled’ status can lower your CIBIL Score because it suggests you were not able to fulfil your credit obligations completely.
But do not despair, there is a silver lining. There are some strategies that you can adopt that can help you mitigate the impact of loan settlement and effectively improve your score over time.
How to improve CIBIL Score after loan settlement
Improving your CIBIL Score post-settlement is not as daunting as it sounds. The first step is to ensure that all your remaining loans and credit card bills are paid on time. Consistent and punctual payments show that you are responsible with credit, boosting your score.
Another important aspect is maintaining low credit card balances relative to your credit limit. High credit utilisation and maxing out your credit cards can negatively impact your score. Aim to reduce your credit card balances to below 30% of your available limit. This demonstrates responsible credit utilisation and can improve your score.
Even if you have settled some loans, you should keep your old credit accounts active. The length of your credit history matters, and older accounts with good repayment history can positively influence your score. Closing old accounts can potentially shorten your credit history and increase your credit utilisation, which may not be in your best interest.
Maintaining a healthy credit mix by having a balance of secured loans (like home or auto loans), unsecured loans (like collateral-free personal loans), and credit cards can have a positive effect on your score. Lenders often view a diversified credit portfolio as a sign of financial stability. However, this does not mean you apply for credit products you do not need and cannot handle, just to diversify your credit mix. Doing so multiple times, especially within a short span, can negatively impact your score. Plus, lenders view this as credit-hungry behaviour.
Remember to monitor your credit report regularly for inaccuracies or discrepancies. If you find any, report them to the concerned credit information company to get them rectified right away.
Finally, it is important to be patient. Improving your CIBIL Score, which is definitely achievable, will take time and consistent effort. Do not expect an immediate rebound in your score after settling a loan. It may take up to a year of responsible behaviour to see significant improvements.
The good news is that your journey to enhance your score post-settlement need not be a solo endeavour. Instead, you can depend on the Bajaj Finserv Credit Pass to help make things more convenient. Its personalised dashboard affords a complete overview of all your credit accounts in one place, allowing you to track your credit factors with ease. Get real-time insights into your Credit Health Report and monthly updates to your CIBIL Score so you can stay up to date with your credit standing. Confidently make credit-related decisions with the interactive tools in your corner, helping you predict the impact of your choices and plan your future commitments, and watch your credit health bloom. Sign up today in three simple steps and enjoy access to all Credit Pass benefits.
