For a long time, banks and financial institutions have been using CIBIL scores to identify individuals with poor credit profiles and avoid lending to them. This score serves as a measure of your financial discipline, repayment capacity, and overall credit behavior. Whenever you apply for a loan, banks first check your CIBIL score. A score above 700 is considered decent, while a score above 800 is excellent, allowing borrowers to negotiate for lower interest rates.
Loan Settlement Can Be Harmful
Many people opt for loan settlements with banks, especially in the case of personal loans and credit card debt. More than 90% of settlements involve credit card-related dues, as these loans are unsecured, unlike home or car loans. When borrowers fail to repay secured loans, banks can recover some amount by repossessing assets like houses or cars. However, for credit cards and some personal loans, lenders lack this option.
A Rising Trend Among Youth
Today’s youth heavily rely on credit cards for their daily expenses. Since credit cards offer an interest-free repayment period, many young people overspend without considering their repayment capacity. Later, when the bill is due, they opt for settlements. However, it is important to remember that while banks may agree to a settlement with some adjustments, they report it to CIBIL, which negatively impacts the borrower’s credit score.
Also Read- How to Check Your CIBIL Score for Free by Using a PAN Card
Loan Settlements Are Reported to Banks & Financial Institutions
Once you settle a credit card bill or any other loan, the bank reports this to CIBIL, marking it as a negative event. When you apply for a new loan, lenders check this score and may reject your application. Even if a small lender agrees to provide a loan, they charge a significantly higher interest rate.
In short, while a settlement might save you some money initially, it can close the doors to future borrowing. Instead of settling a loan, it is better to negotiate with the bank for extra time to repay. This approach helps maintain a healthy credit score.