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The most important step you should take to improve your credit score is by paying down the balances for all your accounts. This would steadily improve your credit score and your creditworthiness.
Any uncommon or unknown situation like a medical emergency or a financial crisis, which brings in extra expenditure is still your responsibility. You are financially accountable and should be able to manage your Credit Card Bills, EMIs, and dues. But when you struggle to pay out your loans, your lender may suggest an alternate way with One Time Settlement (OTS). But before you accept the offer to settle the account, you must understand what OTS means for you and your credit history.
A loan settlement is clearing the outstanding loan principal and interest amount by paying back a lower sum as a final call to close the account. Generally, for such settlement the principal amount is paid and the lender waives off the interest.
The settlement of a loan account however, incurs a financial loss to the lender, as they write off the waived off the amount in the accounts and report it as a loss and report to the Credit Bureau. A loan settlement thus appears negatively in your credit information report. Any negative history in your report would stays active for 7 years thus ruining your chances of availing a new loan in the future. The lender may also blacklist you for future transactions with their bank or financial institution. So it is advisable to carefully set your terms before accepting the lender’s offer.
Before you accept the offer to settle your loan, you must ask the lender to close the account and not settle it. Before you make the payment, you can negotiate with the bank to clear the disputed items such as late payments etc. Ask for charge back facility so that the disputed transaction of default or late payment is temporarily reversed. It is essential to possess proof of payment before closing the account. Collect a ‘no-dues certificate’ from the lender. This will help you in case of any dispute later on.
Additional Reading: Tips to get your dream credit score
Although settling the loan account will ease your monthly EMI woes, poor credit score would still stay for a long to haunt you. Let’s see how to improve Credit score quickly after a loan settlement.
Your credit report is the first document any lender would access to evaluate your eligibility for a loan. You will have to ensure that you build a good history henceforth to fade off the bad past record in the report. Make certain that you repay all your credit bills and EMIs before the due date from now on as repaying your monthly instalments on time builds up good score faster.
If there are any other outstanding accounts such as credit card balance or loan accounts, make sure you clear off all those balance too. Credit card balances adversely affect the CIBIL score. You must be careful not to let irregular payments hurt your score anymore.
Sometimes too many cards can also add to the woes. It often happens that an idle card which is no longer being used is causing a default payment on annual charges and reflecting a red mark in your report. Check all old cards and close the ones you no longer require. However, do retain the oldest card with good history. For, a long and good history is very helpful in raising future credit.
If you do not have a credit card, you must apply for one. A settled loan should not stop you from using credit. Using a card optimally helps to enhance your credit score and loan approval chances. Make sure you use your card and repay the entire bill before the due date. This will help you build good score quickly.
After the settlement, ensure that no further action of yours show you as credit hungry. Do not apply or query for a new loan for a few months after settlement transaction. Any loan rejection can further tumble down your credit score.
With bad score, it is difficult to avail an Unsecured Loan. In case you do need funding, make sure you apply for a Secured Loan and have a back-up for repayment. You can also rope in a guarantor or co-signor along to get a low rate loan.
Know about- How to improve your poor credit score?
