How to improve CIBIL score after loan settlement?

Mon, 12/05/2022 - 09:46

Author: JLL


What do you mean by "Loan Settlement"?

Wondering what a loan settlement is? Well, loan settlement is negotiating with the bank to waive some debt and make a full and final settlement. It is also known as "debt resolution," "debt settlement," or "debt relief." It is believed that loan settlement is usually done between the bank and the borrower, but the truth is otherwise. Whenever you opt for a loan settlement, the bank agrees to waive some amount, which saves you money but negatively impacts your CIBIL score. Yes, the bank records the waived-off amount as a loss to the bank and informs the CIBIL bureau about the loan settlement.

Ways to improve CIBIL score after loan settlement

Clear your debts

Unpaid dues on your credit card or loan could be a big drawback, resulting in a poor credit score. Therefore, clearing all your outstanding bills is an important aspect when you aim to improve your CIBIL score after loan settlement. The more regular you are about clearing your dues, the better your CIBIL score gets. Hence, it is advisable to pay it regularly, especially when you have settled your loan. In this context, you must remember that any negative impact on your credit score will take up to 7 years to write off from your credit history while the lender may also blacklist you from making any future transactions.

Keep using credit card

Yes, even if you have a bad CIBIL score, you should continue using credit cards as it is the only way to improve it. However, you need to pay your credit bills on time, without fail. Discontinuing or keeping the credit dues outstanding for a longer period will decrease your CIBIL score. Moreover, the interest will keep piling up on the dues. Hence, you must limit your credit usage. Generally, lenders aim at 750, which is the minimum that banks consider creditworthy. It is advisable to use the 30-50% of credit limit to improve your credit score. However, depending on your own credit status, it may take 4 to 12 months to attain this score, but once you do, you'll have no challenges to face in accessing a credit card.

Avoid multiple loan inquiries

After loan settlement, avoid taking loans for at least a year. However, in case of emergency, you can apply for a loan but one at a time. Multiple loan inquiries on your CIBIL report will portray you as credit-hungry. These inquiries on your report will drop your credit score drastically, and your past record of loan settlement will further make the lender unsure about approving a loan. As a result, your loan request will be rejected. This may worsen the situation when you get rejected from another lender.

Keep a healthy mix of credit

The type of loan you take out can also affect your CIBIL score. There are two main types of loans: secured and unsecured. A secured loan is used to purchase an asset, while an unsecured loan is used to invest in depreciating assets. A healthy credit mix gives lender the idea that you are trustworthy and have a good capacity to repay the loan. You can build your portfolio using the 80-20 rule, which states that 80% of your portfolio should be secured loans and 20% unsecured loans.

Convert your account status from "Settled" to "Closed"

Whenever you plan to settle your loan, it is important that you negotiate with your lender to close the account and not settle. The settlement of the loan indicates that the borrower was short on money and has not repaid the entire amount, making the lender bear the loss which indirectly drops your credit score, ruining your portfolio. Therefore, it is advisable to close the loan, which will improve your score and reduce the challenges that may have occurred on mentioning the status "settled.". Therefore, before accepting the lender’s offer, you must understand the terms and conditions laid out by the lender.

With these tips, you can now rebuild your credit score even after a loan settlement.