Does Credit Card Settlement Hurt Your Credit Score? What You Need to Know
Credit card debt can quickly become overwhelming, and when repayment becomes difficult, credit card settlement may seem like a way out. However, many borrowers hesitate to opt for settlement due to concerns about its impact on their credit score.
In this blog, we’ll explain how credit card settlement affects your CIBIL score, the pros and cons, and alternative solutions to consider before making a decision.
What is Credit Card Settlement?
Credit card settlement is a process where a borrower negotiates with the bank to pay a reduced amount instead of the total outstanding balance. Once the agreed amount is paid, the bank marks the account as “Settled” instead of “Closed”, which can negatively affect the borrower’s credit score.
Example:
If you owe ₹2,00,000, but due to financial hardship, you cannot repay the full amount, the bank may agree to settle the debt for ₹1,20,000 as a one-time payment.
How Credit Card Settlement Affects Your Credit Score
✅ Lower Credit Score – Once a settlement is reported to credit bureaus like CIBIL, your score drops because the loan is marked as “Settled”, which signals partial repayment instead of full repayment.
✅ Reduces Creditworthiness – Future lenders may see a settlement as a sign of financial distress and may hesitate to approve new loans or credit cards.
✅ Long-Term Impact – A “Settled” status remains on your credit report for up to 7 years, making it difficult to get loans with favorable interest rates.
✅ Difficulties in Future Borrowing – Banks may reject future loan applications or offer higher interest rates if they see a settlement record on your credit report.
Alternatives to Credit Card Settlement
Before opting for settlement, consider these alternatives that have a lower impact on your credit score:
🔹 Debt Restructuring – Request the bank to restructure your debt by extending the tenure or lowering the EMI.
🔹 Balance Transfer – Transfer the balance to another bank offering lower interest rates to manage repayments.
🔹 EMI Conversion – Convert the outstanding amount into manageable monthly installments instead of settling.
🔹 Personal Loan for Debt Clearance – Take a lower-interest personal loan to pay off your high-interest credit card debt.
When Should You Consider Credit Card Settlement?
✔ If you are in severe financial distress and cannot pay the full amount.
✔ If you have no other repayment options, and legal action is a possibility.
✔ If your income is unstable, making regular EMI payments impossible.
How to Rebuild Your Credit Score After Settlement
If you have already opted for credit card settlement, here’s how you can improve your credit score:
✅ Make Timely Payments – Pay all future EMIs, credit card bills, and loans on time.
✅ Apply for a Secured Credit Card – Use a secured credit card (backed by a fixed deposit) to build positive repayment history.
✅ Monitor Your Credit Report – Regularly check your CIBIL report and ensure there are no incorrect entries.
✅ Limit New Credit Applications – Avoid applying for multiple loans immediately after settlement.
Final Thoughts: Is Credit Card Settlement a Smart Choice?
Credit card settlement is a last-resort option for borrowers facing extreme financial hardship. While it can help clear your debt, it significantly impacts your credit score and future borrowing ability. Before settling, explore other repayment options that may have a lesser impact on your financial health.
Need Expert Assistance?
At Settle Loan, we specialize in negotiating settlements with banks while helping you protect your credit score.
📞 Call Now: 1800 309 1902
📧 Email Us: info@bankharassment.com
