Ways To Build Credit Score After A Loan Settlement

A good credit score can help to build a good credit profile and get the required funds at attractive terms. Stable repayment history, good credit utilisation ratio, and ageing of credits are a few factors that determine your credit score. It is good to understand the habits and factors that also bring down your credit score. Loan settlement is one of the major factors that can significantly create a negative impact on your credit score.

Loan Settlement - What It Means?

In case of continuous defaults and long outstanding credit card and loan accounts, the lenders go for a loan settlement. It means the lender will forgo a portion of or complete interest and request the borrower to settle the balance interest and or principal amount. When a loan account is settled, the loan that is waived off is reported as “Settled” to the credit bureaus. It invariably means that you were not able to settle your outstanding and a compromise has arrived. This negatively impacts your credit score. Your credit score can fall lower than your current bad status. 

But this is not the end. There are ways in which you can prevent your credit score from turning worse.

Proven Ways To Build Credit Score After A Loan Settlement

Here are the foolproof ways to improve your credit score after a loan settlement

Try To “Close” Your Account Instead Of “Settle”

Settlement of loans is always considered a last resort. The lender will consider settlement if your account has gone to a delinquent state and he sees no signs of repayment. The lender will put the defaulter in the “no transaction” list otherwise called a blacklist. The borrower cannot have any credits or hold any deposit accounts with the lender. Your “settled” status will get reflected in your credit report for 7 years.

Loan settlement for genuine reasons like ailment, accident, and loss of employment can save your unfortunate situation. You can consider the settlement of dues to come out of the enormous stress. But settling a loan has larger negative sides, though it can seem an easy way out. 

• Try negotiating with your lender to clear a part of your outstanding that is mutually beneficial with a specific timeline. You can request a chargeback where the compounded interest and late fees are reversed by the lender. This can reduce your outstanding balances and make repayment easier. 
• Understand that loan closure is repayment of the actual outstanding amount. You can request a relaxation of the repayment time or negotiate the amount that you can pay gradually to settle the outstanding.
• If you want to change the “settled” status to “closed”, you can talk with the lender and settle the balance due on the settled loan. This has a positive impact on your credit profile. 
• Do not forget to get a No Objection Certificate or No Dues Certificate from your lender when you close your loan account. This shows that you have a clean chit and prevent from getting into the list of defaulters.

Convert To A Term Loan

Speak with your lender if he can convert all your credit cards outstanding into a term loan with EMI for a specific period. This can help you to reduce the stress of falling into a credit default. Though interest rates are high for a term loan, you can plan and split your financial burden into EMIs and pay them regularly.

Clear The Outstanding Dues 

Clearing the outstanding is always considered a good measure in improving your credit score. This is because any outstanding beyond the credit period will add interest. If you accumulate your credit card balances, you are adding more liability by compounding interest on interest on the existing outstanding. If you are not in a position to pay all your debts, consider repaying in smaller chunks so that payments are recorded in your credit profile. Repaying regularly and consistently can help you to avoid falling into a debt trap.

Keep Your Credit Utilisation Below 50%

It is always advisable that your outstanding balance on revolving credits is below 30% of your available credit limit to have a good credit score. In case of long outstanding credit card dues, it is advisable to keep your credit utilisation limit below 50%. Avoid using your credit card for big-ticket purchases. It is important to have the intention of repayment when you swipe your credit card for any payments.

Go For Secured Credit Cards

These are credit cards provided against a lien on fixed deposits. In case of any defaults, the lender has recourse on the fixed deposit and he can earn from interest on the same. Secured credit cards can be purchased with a fixed deposit as low as Rs 25,000 and it varies according to the lender. This can help in getting new credits and improving your credit score after a settlement.

Secured loans must form 70% to 80% of your credit mix to have a good credit profile.

Wait To Apply For A New Credit

Don't start applying for new credits if you have gone for a loan settlement. Any immediate new applications can denote that you are credit hungry and the rejections can even worsen your credit score. Wait for at least 3 to 6 months to apply for new credit after a loan settlement.

Loan settlements harm your credit score and credit profile. You should keep track of your spending and repayment habits regularly to avoid falling into debt and a default trap. While nothing else helps you out, a loan settlement would seem to be a relief. But exercise this option with caution as it has rippling effects on your future financial health.