Loan settlements can significantly impact your CIBIL score, a crucial factor for obtaining future credit. When a loan is settled for less than the full amount owed, it’s marked on your credit report. Understanding how to address and recover from a loan settlement is essential for maintaining financial health and improving creditworthiness.
“When you settle a loan, it indicates that you were unable to repay the full amount, and the lender accepted a lower amount as full payment,” Anand Agrawal, Co-Founder and CPTO, Credgenics, explains.
This settlement status is reported to credit bureaus and remains on your credit report for several years.
Consequently, it can lower your credit score and suggest to future lenders that you might be a high-risk borrower.
This perception can make it challenging to secure credit or loans in the future.
Agrawal advises: “It’s generally better to repay loans in full if possible to avoid these negative impacts.”
How to remove loan settlement status from CIBIL report
If you’ve settled a loan and want to mitigate the damage to your credit report, Agrawal suggests negotiating with the lender.
“Start by requesting a ‘full payment’ status. Offer to pay any remaining amount and ask for an updated credit report reflecting this,” he advises.
Once you reach an agreement, obtain a “no dues” certificate from the lender.
Next, submit this certificate along with proof of payment to CIBIL.
“CIBIL will verify the information with the lender, and if everything checks out, they will update your credit report,” Agrawal notes.
This process can help improve your credit report.
Strategies to improve credit score after a settlement
Rebuilding your CIBIL score post-settlement requires diligent financial practices.
Agrawal suggests starting by ensuring all bills and EMIs are paid on time to build a positive payment history.
“Keep your credit utilisation ratio below 30% and manage your credit card balances carefully,” he recommends.
Avoid applying for multiple loans or credit cards within a short period, as this can be a red flag to lenders.
Regularly reviewing your credit report for errors and disputing any inaccuracies with CIBIL is also crucial. “Consider taking a small loan or secured credit card to gradually rebuild your credit history,” Agrawal adds.
With consistent financial discipline and timely repayments, you can work towards improving your credit score over time.