Will Settling a Debt Affect My Credit Score?

When we take up a loan, our first intent is to pay it back and clear it fully, but it also happens that some of us may not be able to repay the loan EMIs on time. In such a scenario, it becomes very difficult to decide what one must do. There is, however, one way that can get you out of the debt, which is by settling it with your lender. If you & your creditor reach an agreement, then you can settle the debt for a lower lump sum payment. So, you basically put an end to the debt by negotiating on the total loan amount. Hypothetically, say you have a loan of Rs 10 lakh and you are unable to pay the loan EMIs, then you & your creditor can enter an agreement to settle the debt for a one-time payment of Rs. 2 lakh.

Related Reads: 5 Practical Steps to Get You Out of Debt

Better than Unpaid but worse than Paid as Agreed

Your credit report maintains records of your loan EMI status & history of credit card dues. It lists whether you have paid your monthly dues & loan EMIs on time, before or after the due date. So, when you are done settling your debt with a lump sum payment, your creditor updates the status of the loan as Settled? or Paid Settled? on your credit history. It is definitely better than an Unpaid? status update on your credit report, but it is not as good as a Paid in Full? status, which would’ve been updated had you paid the full amount. Any status other than the latter can hurt your credit score.

In addition to settling your debt, there are other factors that can have an impact on your credit score. But, the degree of the impact of each factor on your credit score varies & cannot be identified accurately. Debt settlement can, nevertheless, have a noticeable impact on your credit score! When you opt for debt settlement, the account is not removed from your report immediately. If you made late payments while you were paying the loan EMIs, then this account will reflect on your report as a factor for 7 years, starting from the first date of late payment.

Lay the bricks of rebuilding your credit score after debt settlement

The credit score is a dynamic number that keeps changing depending on your financial activities & any score above 700 is considered to be a good score. If you are in a situation of not having paid your loan amount on time & this has affected your credit score, then you must start taking measures to rebuild it:

1. Ensure timely payments of all your dues hereon. In fact, make use of the auto-debit feature on your net banking platforms, so that money is automatically debited from your account as soon as you receive your monthly income. Your payment history is the most important component on your credit report.

2. Monitor & control credit utilization no matter how high is your credit card limit. Make it a point to set a limit of utilizing only 30% to 40% of your credit limit to keep your expenses under control. You can even set daily & monthly spending limits on your credit card. So, you can use this feature as well to make sure you don’t overspend & land in another situation of excessive debt.

3. Keep an eye on your credit score to see its progress. Tap the entries of all your transactions & evaluate your risk factors. Your report consists of the risk factors you are exposed to along with your score & this tells you what you must start improving first to ensure a healthy credit score.

Begin rebuilding your credit score by getting your free credit report from CRIF!