When you heard the term “settled” it gives you peace of mind and relaxation. Does it really helpful in long run? Will it give you peace of mind in long run? Most of us carry one or more credit card nowadays, as it is one of the most common thing among working class to make payments and buy things. Credit card is a very helpful financial tool if used wisely, but it could land you into a foul soup if you will use it without considering the consequences of its higher usage and default payments.
Ronak Misha, a HR executive, in Pune owns two credit cards. He was very happy when he got his first card, as he thought, now he is into the league of other high class people. He also considered it as extended spending limit, but forgot that he is supposed to make the payments of the same on month-on-month basis. He got another complimentary card from the same company based on his usage and payment history. But, the whole situation goes south when he started making default payments because of increased outstanding and higher EMIs. His total outstanding on both cards were more than Rs. 2 lakhs, which he was finding difficult to repay. He visited the bank for settlement of outstanding amount. The bank agreed to accept Rs. 1.70 lakhs to settle the loan. Ronak, now feeling relaxed and tension free as there is no outstanding on his part and he is not supposed to pay a huge EMI against his credit card debt. Has he taken the right step? Does his idea of settling the loan was right? To know wither his whole idea of settling the loan was in his favours or not, let's consider few points.
Long-term consequences: Settling a credit card loan can leave reverse impact on your credit history. If the bank is not satisfied with the settlement amount, it can sue you to get the whole amount. Which could further increase your financial burden.
Impact on credit history: If you go for credit card settlement it can create negative impact on your credit history. If you will apply for any loan in future it will be marked in your report as ' settled' which will create a negative impact on your credit history.
Lower the chances of getting another loan: As you have a negative credit history and most of the banks consider the credit history and credit report before lending you the loan to check your credit worthiness. A negative credit history will lower your chances of getting another loan or it will be difficult for you to convince the lender to offer you an unsecured loan. If you are in your late 50s of age, it is good option to become debt free and settle your loan before your retirement, but if you are in your 40s of age, then you should avoid settling the loan rather make the payment by taking personal loan or borrow money from your friends or family members to make the payment against your credit card debt.
Difficulty in improving credit history: It is not easy to improve the credit history. It takes time to build a good credit history as you need to pay more attention to your outstanding and payments on time. It will take another few years for you to improve your CIBIL score and build a good credit history.
“Settled” gives wrong message: The word “Settled” gives a wrong message to the lender, when it digs your credit history. It showcases your default payments and indicates your low creditworthiness. It also gives the impression of higher risk factor with you as your credit history is not much promising.
Higher rate of interest and other charges: If any bank agrees to offer you a loan in the future, then for sure it will offer you the loan on its terms. Your chances of negotiating with bank reduces because of your defaulted credit history. In such case, banks offer you a loan on higher rate of interest with other higher charges. So, settling your debt could lead to a higher rate of interest in future for a loan.
Lower loan eligibility: When you apply for a new loan in future with a faulty credit history, there are chances that bank will offer you a loan amount lower than your eligibility or required amount. So, it reduces your chances of getting a higher loan amount be it a secured or unsecured loan.