Every person aims to have a high CIBIL score because it is proof of their credibility and plays an important role in credit card and loan acceptance. The relevance of the CIBIL score.
The CIBIL code is a three-digit number that varies from 300 to 900. The closer your credit score is near 900, the more trustworthy your credit profile is
When an individual applies for a loan or a credit card from a bank, it is extremely important. It is the primary and most important screening criteria for determining a person's reliability. It's similar to your bank's ranking and favorability.
What is the Meaning of a Loan Settlement?
A loan settlement is a final call to end an account that resolves the outstanding loan principal and interest amount by paying back a reduced payment. In most cases, the loan is settled at the principal amount, with the lender waiving any outstanding interest.
Many believe that increasing your CIBIL score after paying off your credit card bills will be simple and quick. However, it takes time and patience to get there.
The settlement is the circ*mstance in which a car owner is unable to pay his or her dues amounts on his or her credit cards. The bank requests an overdue settlement to keep things simple.
The bank will require the cardholder to pay a specific sum in lieu of the total dues and will stop providing credit card services to him/her in this overdue settlement. Despite the fact that the cardholder is now debt-free, the settlement has a negative impact on their CIBIL score.
Effect of a Loan Settlement on Your Credit Score
The lender suffers a financial loss when a loan account is settled, therefore they write off the waived off amount in the accounts and record it as a loss. The Credit Bureau would receive the same information.
As a result, a loan settlement will appear on your credit report as a negative item. Any unfavorable information on your credit report will stay on your record for seven years, ruining your chances of getting a new loan in the future.
The lender may also put you on a no-transaction list with their bank or financial institution in the future. As a result, before accepting the lender's offer, you should carefully define your terms.
Steps to Improve CIBIL Score After Settlement
Although paying off the loan account will reduce your monthly EMI burden, your poor credit score will continue to be a burden on you for a long time.
A high CIBIL score, as we all know, is what makes you eligible for a loan and credit card. To impress the bankers, one should have a good CIBIL score. Don't be discouraged if your CIBIL score is poor for whatever reason.
You must now take strict control of your financial condition and take appropriate efforts to raise your credit score. Let's look at ways to swiftly increase your CIBIL score after a loan settlement:
1. Build a Good Credit History
The first document a lender will look at to determine your loan eligibility is your credit report. As a result, you must guarantee that you create some positive history while fading the negative history mentioned in the report. From now on, make sure you pay all of your credit bills and EMIs on time. Paying your monthly installments on time quickly improves your credit score.
2. Convert Your Account Status from 'Settled' to 'Closed'
Changing your account’s 'Settled' status to 'Closed' with your credit card company is one of the simplest ways to enhance your CIBIL score. To do so, you must pay off all of your debts once and for all.
A 'Settled' status has a negative connotation because it signifies that the individual has not totally paid his or her debts. If your debts are really high and paying them all at once is nearly difficult, we recommend that you speak with your bank or credit card provider.
Try to come to an agreement on a specific sum that is both within your means and appealing to your bank or credit card business. It will undoubtedly have a good influence on others if you have a 'closed' status in your CIR.
3. Pay Your Dues Regularly
Your payback history is a major element in determining your credit score, accounting for nearly one-third of it. Making all of your loan/credit card payments on time and in full, starting immediately away is one of the most efficient ways to restore your credit score.
Your score will be affected immediately and significantly as a result of this. You may need to cut back on your expenditures to be able to make full payments, but the boost to your credit score will be well worth it.
4. Clear Any Outstanding Dues
Any loan or credit card balance that remains unpaid has a significant impact on your credit score. Though it may appear tough at first to come up with the funds to pay them all off, it is a good idea to negotiate with each of your lenders to come up with a figure that would cover all of your obligations.
The longer you delay, the more interest accrues, and you'll have to pay a considerably higher sum to pay off your debts. Simultaneously, your credit score continues to decline as you delay payment. In truth, deferring repayments on your outstanding loan or credit card has only negative consequences. Paying it off will help you improve your credit score and loan eligibility.
5. Get a Secured Card
You must apply for a credit card if you do not already have one. You should be able to use credit even if you have a settled loan. Getting the most out of a credit card might help you improve your credit score and increase your chances of getting a loan.
Use your credit card and pay off your entire amount before the due date. This will assist you in achieving a high score quickly. If you are unable to obtain a card, you must apply for a secured loan secured by a fixed deposit.
You can start with a tiny FD of up to Rs 25000-30000 to get your feet wet. A card with a 90 percent FD limit will be approved quickly by the card provider.
6. Keep Available Credit Limit Above 50%
The amount of money you have available on your credit accounts is another aspect that affects your credit score. Make sure you don't utilize more than half of the credit limit you've been given.
For example, if your credit card has a limit of Rs. 50,000, don't spend more than Rs. 25,000 per month on it. Anything more indicates a lack of financial discipline and a desire for credit. Your grade will suffer as a result of this. To increase your score, make sure you only use half of your available time.
7. Do not Apply for or Enquire About Loans
Following the settlement, you must make certain that no future actions on your part portray you as a credit-hungry prospect. Within a few months of the settlement transaction, do not apply for or inquire about a new loan.
A loan denial, for example, can lower your CIBIL score even worse. You must focus solely on rebuilding your credit score while doing so, and not seek more credit.
8. Continue to Utilize Credit Cards
Many people have been burned by their credit and have stopped using their credit cards in order to improve their credit. This is a terrible concept.
Keep in mind that in order to rebuild your credit score, you'll need to use it. Only by demonstrating appropriate credit behavior will your credit score increase. Your credit score will suffer as a result of your lack of credit activity.
Another strategy to enhance your credit score is to use only a tiny portion of the credit limit available to you and pay it off in full each month.
9. Make Sure You Get the Right Kind of Loan
Your CIBIL score is also influenced by the type of loan you take out. Secured loans and unsecured loans are the two basic forms of loans.
Secured loans are ones that are used to construct or purchase a stable asset. A secured loan is a loan that is used to buy a house. Unsecured loans, on the other hand, are used to purchase depreciating assets.
Unsecured loans include vehicle loans, vacation loans, and credit card bills, to name a few. Unsecured loans have a negative impact on one's CIBIL score, whereas secured loans have a favorable impact. A portfolio with 80% secured loans and 20% unsecured loans is regarded as optimum and has a good impact on the CIBIL score.
10. Be Smart in Using Your Credit Card
It is typical behavior among credit card users to spend a lot of money on their card without considering the long-term consequences. The majority of cardholders are unaware of how to properly utilize their credit cards, which results in a low CIBIL score.
The best approach to utilize a credit card is to only use 30-40% of the total credit card limit per month. With this spending limit, you'll be able to maintain a manageable payout amount and avoid any pending payments.
11. Don’t Fail to Get NOC from Your Credit Card Company
It is recommended that you obtain a NOC from your card provider before closing any card. Taking a NOC has a significant negative impact on your CIBIL score. A NOC signifies that the cardholder has received a clean chit from the bank and is a responsible cardholder. Always obtain a NOC from your card provider within 45 days of the card's closure.
When it comes to credit scores and financial credibility, diving into the nuances is second nature. The article you've shared taps into the critical aspects of managing credit health, specifically highlighting the significance of CIBIL scores and the ramifications of actions such as loan settlements.
Let's break down the key concepts mentioned:
CIBIL Score:
- What it is: A three-digit number ranging from 300 to 900 that reflects creditworthiness. The closer to 900, the better.
- Significance: It's pivotal in loan and credit card approvals, acting as a primary screening criterion for a person's reliability.
Loan Settlement:
- Definition: The final resolution of an account by paying back a reduced amount, often the principal, with waived-off interest.
- Impact: Settling a loan affects the CIBIL score negatively, as it's reported as a negative item, staying on record for seven years.
Strategies to Improve CIBIL Score Post-Settlement:
- Building Good Credit History: Timely payments improve the credit report.
- Changing Status to 'Closed': Paying off debts entirely changes a 'Settled' status to 'Closed,' positively impacting credit reports.
- Regular Dues Payment: Timely payments substantially contribute to score improvement.
- Clearing Outstanding Dues: Negotiating and paying off all dues prevents a decline in credit score due to accrued interest.
- Utilizing Secured Cards: Applying for a secured credit card or loan against a fixed deposit aids in rebuilding credit.
- Maintaining Available Credit Limit: Keeping credit utilization below 50% demonstrates financial discipline.
- Avoiding New Loan Applications: Post-settlement, refraining from applying for new loans helps rebuild credit.
- Continued Use of Credit Cards: Responsible use of credit cards, keeping balances manageable, helps improve credit scores.
- Choosing the Right Loan Type: Secured loans have a positive impact compared to unsecured ones.
- Smart Credit Card Usage: Keeping spending within limits and managing payments responsibly is crucial.
- Obtaining NOC (No Objection Certificate): Getting a clean chit from the bank after closing a card mitigates negative impacts on the CIBIL score.
Each strategy mentioned in the article is geared toward gradually rebuilding creditworthiness after a setback like a loan settlement. It's a meticulous process that demands discipline and patience but can yield significant improvements over time.
