Credit scores are like your financial report cards. A good CIBIL score can aid in getting low-interest rates, determine your eligibility to avail of loans, and credit cards, and even help with securing rental agreements. If you pay all your outstanding dues on time and are disciplined with your payments, you can boast an excellent credit score. Lenders check credit scores to determine if an individual is a reliable borrower and if they have the repayment capability to return the loan amount. Read on to know more about credit scores, tips to improve credit scores, and what to do to improve credit scores after a settled loan status.

What is loan settlement?

If a borrower is struggling to pay off the loan amount, they may request and negotiate with the lender to ‘settle’ their loan. Borrowers pay less than the amount stated on their original loan agreement to close off the loan. They may do so with a one-time payment or make a series of payments to settle the due amount. Loan settlement is usually the last resort for borrowers, who are facing a financial crunch and cannot pay off their monthly settlements.

Loan settlements can severely impact a person’s credit score. It is viewed as a partial payment or a charge-off, thereby making it more difficult for them to obtain credit in the future. It is important to note that loan settlement is completely different from closing a loan or loan forgiveness. If you are struggling to pay EMIs and are considering loan settlement, make sure to consult professionals, like credit counselors and financial planners from ApnaPaisa before resorting to this option. They will also help you plan your budget and negotiate with lending firms.

Tips to improve your credit score after settled status

• Improve your credit history: The best way to start improving your credit score after a settled loan status is to build up your credit history. Make small purchases and try to pay your dues before their deadlines. Try to avoid applying for new credit every now and then, as the hard inquiries that occur when a lender checks into your profile when you apply for new credit can negatively impact your credit score.

• Pay off your dues on time: Paying your bills on time is one of the biggest factors that help in boosting credit scores. Late payments or missed deadlines are a strict no-no. The best way to ensure that your payments are made on time is to set up automatic reminders. However, in that scenario, you must always have enough money in your bank account to pay the EMIs. Regular payment history will positively impact your credit score.

• Clear all outstanding debts: If your fixed-obligations-to-income ratio (FOIR) is very high, it is best to stop taking more loans and clear all outstanding dues first. Having too many ongoing loans is a major red flag for borrowers. Credit scores are impacted not only because of a settled loan status but also due to ongoing debts. You can do a balance transfer to collate all loans into one to make it easier for you to pay back.

• Use credit cards responsibly: You can use your credit card regularly to boost your CIBIL scores, however, make sure to keep your credit utilization low. If your credit limit is INR 10,000, you must always keep it to INR 3000 to show lenders that you are a responsible borrower. Note that credit cards have considerably higher interest rates, hence you must pay your credit card bills on time to avoid another financial headache.

• Maintain a mix of credit: It is good to have a variety of credit cards, debit cards, and installment loans like mortgage loans and car loans. It gives off the impression that you are capable of paying back multiple monthly installments and increasing your creditworthiness. However, never spend more than 60% of your income on paying off debts. It is not sustainable in the long run and may considerably reduce your standard of living.

• Keep old credit history open: A long credit history is extremely beneficial when improving credit scores. If you ran into some financial trouble and had to opt for loan settlement, lending firms will evaluate your previous history and if you had a good record, you may avail of loans and benefits. Always avoid applying for new credit right before applying for a mortgage loan or after doing a loan settlement. These are risky phases where you have to be cautious about your purchases.

• Check your credit card report: It may so happen that your low credit scores are a result of technical glitches. Make sure to check your credit statements often and if you notice any error, report it to the credit card company or your lender immediately. Credit scores are extremely crucial when availing loans to prove yourself as a non-risky borrower.

• Get a NOC from your credit card company: If you have paid all your outstanding dues on time and want to close a credit card, make sure to get a NOC from your credit card company. A NOC also helps clear any legal issue or discrepancy that may arise in the future. Your credit card score will reflect your repayment history and if your EMIs were paid on time, it will give a massive boost to your credit score.

• Be patient: Improving one’s credit score takes time, especially when it has been affected due to a loan settlement. It is not impossible, but do not expect overnight miracles. A combination of the above practices like paying your dues on time, using a mix of different types of credit, and checking credit statements often will slowly add up and boost your credit score over time.

FAQs

Q. Does a good CIBIL score help during loan applications?

A. Lending institutions evaluate your CIBIL score to understand your repayment capacity. A good credit score guarantees lower interest rates and favorable loan terms, as the person has a record of paying back their debts on time.

Q. How to improve your CIBIL score with a credit card?

A. If you have a credit card and use it regularly, try to be more disciplined with the repayments. Clear your dues ahead of time to achieve a good credit score. Check your CIBIL score status online every now and then to accordingly manage your payments.

Q. Does CIBIL score increase after closing a loan?

A. If you have paid all your EMIs on time, you may get a credit score boost after closing off a loan. A decent credit score makes you eligible to avail of more loans in the future.