Ways to build credit score after a loan settlement

We frequently choose to utilise a credit card when we have an urgent financial requirement, mainly due to us not having the funds at that moment. We may also be using our credit cards to meet our monthly bills, which is good as long as we are able to pay the outstanding in full before or on the date it is due.

If you carry a balance on your credit card from one month to the next, you’re adding to the cost of your monthly bills, in the form of interest charged on that credit card balance you couldn’t pay off.

Interest charges are not to be overlooked, that’s because interest charges are added to your balance at the end of every single day, and you’ll be charged interest on that interest already charged from the day before. In other words, the interest on unpaid credit card balances are compounded, causing your balance to grow in size very quickly, before you know it you are  caught in a debt trap.

As things worsen, one of the solutions is to ask your bank for a one-time settlement with the anticipation that our bank will forgive the accumulated compound interest and charges.

What is a loan settlement?

There are many types of loan settlements, the most popular one is one-time settlement, this is when you negotiate a discount of the outstanding debt with your bank or creditors with a one-time payment. Usually, the discount can be 20% to 50% of the outstanding debt, depending on the delinquency of the debt.

How does loan settlement impact your credit report?

Your credit score is a crucial factor that banks use to confirm borrowers’ creditworthiness. To receive future credit from the bank, it is crucial to have a good credit score of 700 points plus. To have a “settlement” entry on your credit file will have an adverse effect on your credit score. This is due to the reason that other creditors who check your credit file, will see that you were unable to fulfil your credit commitment.

After a loan settlement, how to raise your credit score.

If your outstanding debt been delinquent for a long time, there would be an entry against that debt labelled as ‘written off’, this entry has an adverse effect on your credit score. After you have completed your settlement, ensure that the bank update your credit file with the entry “settlement”, this will raise your credit score.

If in the future you are in a position to repay the debt, we would advise that you contact your bank and negotiate a “full and final payment, on the condition that the bank will remove the “settlement” entry and replace it with an entry “paid in full”, this will boost your credit score.

It is important, when you are negotiating with your bank, that they confirm the arrangements that you both have agreed on an email or letter, so that the bank do not make a U-turn after you make the payment. It is important that you ensure the bank or creditors issue a “No Dues Certificate” (NDC) or a “No Objection Certificate” (NOC) which should be stated on your settlement letter, the credit reference bureaus will be updated with “NIL outstanding” or “Closed”, this will not affect your credit score and in many cases will improve it.

Before you go down the road of a settlement, we would suggest that you first ask your bank if they can convert your credit card debt into a term loan, where you can pay an EMI over an agreed term. This will have a positive impact on your credit score, as there will be no adverse entry registered on your credit file and you can then clear your total outstanding debt over a fix term.



Views expressed above are the author’s own.


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