10 WAYS TO RE-BUILDING YOUR CREDIT SCORE AFTER LOAN SETTLEMENT
ABOUT LOAN SETTLEMENT PROCESS
Loan settlement is an agreement between the borrower and the lender where the borrower repays a portion of the debt to the lender which is usually less than the outstanding amount as a final settlement.
Usually, during times of financial hardships such as medical emergencies, job loss, or some other unforeseen events, the borrower is not in the capacity to repay the loan, and depending on the genuineness of the reason the lender can forgive some amount of debt. When the lender pays the agreed amount, the loan is marked as “settled”.
Loan settlement can help the borrower to reach financial steadiness. By doing loan settlement, the borrower can eliminate a financial obligation which will help him to reallocate his funds to other important aspects like savings, emergency funds, investment, etc.
CREDIT SCORE: WHY IT IS IMPORTANT
Before diving into how to rebuild a credit score after a loan settlement let’s understand what a credit score is and why it is so important.
A credit score is a quantitative measure of an individual’s creditworthiness. Also known as credit rating, the three-digit number indicates an individual’s ability to repay debt by assessing their credit repayment history, number of loans and credit cards, credit balance, etc.
A credit score helps lenders and financial institutions to assess the repaying capacity of an individual. Along with that they also assess the terms and interest rates for the loan.
In India, the credit bureaus are TransUnion CIBIL (Credit Information Bureau of India Limited), CRIF Highmark, Equifax, and Experian. These are approved by RBI and operate under the rules and regulations of RBI.
Credit score ranges between 300 to 900 in India. Having a score above 750 is considered by lenders as a good score and there are better chances of getting approved for loans, with better terms and reduced interest rates. Credit scores help the lender to calculate the risk involved in lending to an individual and their repayment structure.
EFFECT OF LOAN SETTLEMENT ON CREDIT SCORE
Having a loan marked as “settled” in your credit history will negatively affect your credit score. It lowers the credit score which will make it difficult for an individual to get loans in the future.
It will negatively impact the lender and the individual may face problems getting the loan approved. Due to the high risk, the lender may increase the interest rates.
Along with that the amount of loan, type, and the time period for which it can be borrowed are also some crucial factors that come into play.
HOW TO REBUILD YOUR CREDIT SCORE
We have seen how loan settlement can negatively impact your credit score. To get back on track and improve your financial situation it’s crucial to rebuild your credit score. This can be done by:
1. REVIEW YOUR CIBIL REPORT FROM TIME TO TIME
You can go to the official website of CIBIL to get your CIBIL score and report by filling in your personal details including your name, date of birth, contact number, and email address. Make sure to verify your details as correct and review your report. In case of any errors or variance try to resolve the issue as soon as possible.
2. REGULAR MONITORING OF CREDIT SCORE
Continuously monitor your credit score to ensure that everything is going in the right way. In case you feel there are any errors or your score is not showing as it should be, get in touch with the credit rating institution and contest for any errors.
It also ensures that you are going on the right track in your credit score improvement journey.
3. PAY DUE AMOUNTS ON TIME
One of the most important aspects that is taken into consideration while calculating a credit score is your repayment history. Having a consistent repayment record will help significantly to improve your credit score.
Paying the dues on time without delay will increase your credit score. To do this it is important to properly plan your income and savings. Making emergency funds and cutting down expenses will help you to make payments on time.
4. UPGRADE FROM “SETTLED” TO “CLOSED”
When the account is marked as “settled” it has a negative impact on your credit score. Lack of creditworthiness is reflected when the borrower pays less than the principal amount borrowed.
It Is advisable to pay all the due amounts to the lender so that the loan account can be “closed”. In case you are unable to pay the whole amount, you can communicate with the lender or the credit card company about your inability and then agree on an amount that is mutually agreeable and affordable for you.
5. PAY OFF ANY OUTSTANDING AMOUNTS
Outstanding loan amounts always bring down your credit score. Along with that, the interest amount keeps piling up and you will have to pay a hefty amount in the end. During financial hardships, it’s difficult to repay the outstanding amounts. But it’s a good idea to talk with the lenders and try negotiating with them to agree to a certain amount that is feasible for you to repay.
6. KEEP CREDIT UTILIZATION BELOW 30%
Experts advise to keep the credit utilization below 30%. Always keep an eye on your spending. For example, if your credit card limit is Rs. 1,0,000 it is ideal to use only 30% which is Rs. 30,000. If you use the whole limit of Rs. 1,00,000 it will become difficult to repay especially if you are facing any financial emergency. Utilizing small amounts and repaying them on time will improve your credit score over time and it will be reflected as responsible financial behavior by the credit card institutions.
7. DO NOT APPLY FOR LOAN OR MAKE ANY QUERIES RELATED TO LOAN
Do not make the mistake of applying or enquiring for a loan immediately after your loan settlement. This should be followed at least for a few months. It is crucial for the borrower to fully focus on repairing the credit score. Any rejection of a loan application based on your loan settlement history will further bring down your credit score, and it is also seen as credit-hungry behavior by credit institutions.
8. PROPER USAGE OF CREDIT CARD
After a loan settlement, it’s important to use your credit card in a responsible way. Unless you use your credit card it will be difficult to improve your credit score. In case you don’t have a credit card then you should apply for one. Using a credit card effectively to pay the due amounts on time will help you to increase your credit score.
9. BE PATIENT AND CONSISTENT
Initially, it may feel difficult and you may feel that it’s taking a lot of time to improve your credit score. The problem of not being able to take credit and trying to maintain good credit practices may seem difficult. However, things take time. Striving to be consistent is the base for improving your credit score.
Consistency in a low credit utilization ratio, timely payment of dues, proper utilization of credit cards, and not taking debts will definitely rebuild your credit score. but with patience and proper planning, you can achieve it.
10. SEEK PROFESSIONAL HELP WHENEVER YOU NEED
You may feel demotivated or lost when you are trying to rebuild your credit score and sometimes it can get overwhelming. You can ask for help or engage professional assistance whenever you feel the need for it.
Professionals with their expertise can help you to understand your situation in a better way and can guide you towards new ways by assisting in making budgets, assessing your income and saving, and giving advice and strategies to increase your credit score.
CONCLUSION
Going through financial hardship can be a difficult phase in anyone’s life and with loan settlement as a final resort, the credit score can be negatively affected. But that does not mean you can’t get back on track and achieve financial stability. Improving your credit score is one essential way to achieve it. Being consistent with your due payments, responsible financial habits, proper utilization of credit, and seeking help when needed will help you rebuild your credit score.
This article is written by Purbasha Parui, a 1st-year law and finance enthusiast from BMS College of Law, Bangalore.
