How To Improve CIBIL Score After Settlement?

The possibility or probability of your credit card or a loan approval increases as your CIBIL score reaches closer to 900. Your CIBIL score keeps changing with your financial behavior, and a CIBIL score of 750 or above is considered good.

Smart Ways to Improve CIBIL Score After Loan Settlement

Listed below are a few ways to improve your CIBIL score after settlement:

1. Changing Account Status from ‘Settled’ to ‘Closed'

The most effective way to improve your credit is to change the status of your account from ‘Settled’ to ‘Closed.’ You could either pay off the remaining due amount, or you can negotiate a settlement amount with your lender. A ‘Closed’ account shows that you have paid the debt in full, which would improve your credit report.

1. Pay Off Your Outstanding Dues

If you have left unpaid loans or bills with your credit card, your credit score will be adversely affected. To ensure that you are not getting charged interest on unpaid dues, pay off any outstanding dues as quickly as possible. Paying off your outstanding dues to credit card and loan servicers as they come will improve your credit history in a prudent way while giving you a stronger chance of getting approved for your next loan.

1. Consistent and Timely Payment of Bills and EMIs

It is also important for improving your credit score that you pay your bills and monthly EMIs on a consistent and timely basis. Paying your bills and EMIs consistently, in full, and on time improves your credit rating. Following a disciplined and consistent payment history shows lenders your financial responsibility.

1. Develop a Good Credit History

Lenders look at your credit report first when vetting new loan applications. It is much easier to get good credit than it is to get bad credit removed. Establish a great credit history by making timely payments and avoiding distress. You must think of the credit history as a tally of credit actions that are exchanged for each other. Over time positive credit actions will eliminate negative credit actions.

1. Don't Apply for New Loans Too Quickly

Be cautious not to apply for loans immediately after settlement - a CIBIL score drop can result. Too many applications make you appear credit hungry to lenders. Get to work rebuilding your credit profile and take out future borrowing obligations on a future date.

1. Don't Completely Stop Using Credit and Credit Cards

Simply avoiding credit completely or cancelling your credit cards does not help you improve your credit score either. Use your credit card to make minor purchases and pay off the total amount before the payment due date monthly. Repeating taking small credit action as a whole will grow your credit history and score over time. 

1. Maintain Your Credit Utilisation Ratio Under 50 Percent

Your credit utilisation ratio affects your overall score. The goal should be to use less than 50 percent of your available credit limit on a monthly basis. Being under-utilised is a sign of financial responsibility which will help you improve your credit score.

1. Use a Secured Credit Card

If you are not able to use an unsecured card first apply for a secured card backed by a fixed deposit. You can begin with a small FD between Rs.30,000 to Rs.50,000 to build credit slowly and responsibly. Use this card for select purchases and pay the dues fully and on time to establish a healthy repayment history.

1. Pick the Right Type of Loans

The type of loan you will get also plays a role in your CIBIL score. Secured loans (e.g., home loan) are positively correlated with your score while unsecured loans (e.g., personal loan) usually have an adverse effect on your score. A balance of secured and unsecured credit is a good way to maintain a good credit picture.

1. Use Credit Cards Wisely

When a credit card usage is high, it can result in high balances and, therefore, a lower score. You may want to use the billable purchases under 30 to 40% of your total utilization. By keeping a controlled credit usage, it makes it easier to repay debts and improve your credit health.

1. Get a No Objection Certificate (NOC)

Make sure to get a NOC from your lender or card issuer within 45 days after the account closure. A NOC would validate that the dues are cleared, and the account has a zero balance. Adding a NOC would lend credibility to your credit profile and help improve your score.

How Loan Settlement Impact CIBIL Score?

A bank or other lender will notify CIBIL when it is writing off a loan. CIBIL does not take into account the fact that the relationship between the bank or lender and the borrower has ended. They refer to the deal as settled rather than concluding it. A loan term settlement is considered poor credit behaviour, and the borrower's credit score declines by 75 to 100 points as a result.

This record has been held by the CIBIL for almost 7 years. Therefore, if the borrower needs to take out a loan at that time, it is possible that the lenders will disapprove of them and try to avoid offering them any loans. Before granting a borrower a loan, banks and other lenders primarily analyse his prior repayment history. Additionally, lenders and banks will not approve the loan if the borrower's settlement is listed on his credit record.

Role of Bank/Lender on CIBIL Score

Lenders or banks may give borrowers a One Time Settlement of the Loan if they are having genuine difficulties making their loan payments. A choice is presented to you by the lender or the bank after six months have passed with no dues being paid. They will evaluate factors like job loss, an accident, or a major medical condition, as well as other factors like these.

The lender or bank officials meet with the borrower, assess his predicament and the sincerity of his issue, and then decide whether to write off the difference between the amount paid and the amount due. The lender or the bank subsequently declares a loss and releases the borrower from responsibility. While the borrower may perceive it as a sign of comfort because he would no longer be on the list of recovery agencies, he is unaware of the fact that he pays a high price for the same.

Lack of Awareness in Borrowers

The One Time Settlement offer is accepted by borrowers who are in a bind but are ignorant of the impact it has on their credit score. They are unaware of the fact that it lowers your credit score more than you might think. As CIBIL will maintain the record for those 7 years, it can make it difficult for the borrower to obtain a loan during that time.

Way out for Borrowers

1. Use OTS only as a last resort
   1. The most important rule is to treat a One Time Settlement as your final option. Only opt for it when no other repayment solutions are possible, as it has the most significant negative impact on your CIBIL score.

1. Negotiate repayment flexibility with your lender
   1. Before considering settlement, talk to your bank about alternatives like extended loan tenure, EMI restructuring, or temporary interest relief. Flexible repayment plans allow you to manage your dues without harming your credit score.

1. Consider alternatives before opting for OTS
   1. Explore all possible options first if you face temporary financial difficulties such as job loss or medical emergencies. Avoid choosing settlement as your immediate solution to financial stress.

1. Leverage assets or support to repay the loan
   1. If feasible, use savings, sell part of your assets, or seek help from family and friends to repay the loan fully. This helps maintain a positive credit record and limits long-term damage to your credit score. 

A good credit score can help you secure lower interest rates on loans and credit cards.

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