A good CIBIL score is an important criterion that helps lenders validate the creditworthiness of borrowers. Naturally, it’s important for you to have a high score to get financial assistance on favourable terms. It’s crucial to pay attention to it and take measures to improve it if it is affected for some reason.
If you have opted for a loan settlement, your credit history can be negatively impacted. While a loan settlement may have helped you ease your financial burden, its effects can hinder your future financing options. In this article, we will help you know how to tackle such a situation and improve your credit score after settling your loan.
What is loan settlement?
A loan settlement is a final step in closing an account wherein you repay a lower payment than the agreed-upon loan principal and interest. Loan settlement is to not be confused with loan closure, where the loan is repaid according to the standard schedule.
In most settlement cases, the loan is settled for the principal amount, and the lender completely waives the outstanding interest. Since the settlement brings a loss to the lender, the credit bureau registers it as such, which eventually negatively impacts your credit score.
Additional Read: Do’s and Don’ts to Improve Your Credit Score
How to improve your CIBIL score after settlement
Some of the most efficient ways to increase your credit score after loan settlement are as follows:
- Pay off any other outstanding debts: Paying off all debts will aid in the clearing of records that reflect a positive credit history.
- Regular and small payments: For any new type of credit, you must pay on time. Small regular payments are better than lump-sum payments. This helps distribute the financial burden and improves your credit history.
- Keep a check on your credit utilization ratio: Financial institutions will still offer you some credit, but that does not mean you should utilize the whole portion. For instance, if you have been offered Rs. 80,000 on your credit card, it is advised to use only 30–40% of the amount. Rational utilization of credit projects you as a financially responsible borrower and helps in improving your creditworthiness.
- Don’t make frequent credit inquiries: Too many inquiries can show an unbalanced financial state, which is bad for your creditworthiness. The credit bureau reduces scores based on the number of inquiries as well. Hence, its frequency must not be more than 3-4 times a month.
- Track your CIBIL reports: You can conduct your credit score check online. You must ensure that your name, PAN number, date of birth, and other information are correct, and you must notify the credit bureau if there are any discrepancies. If your scores had earlier dropped due to a discrepancy, this step could help improve them.
Loan settlements leave a bad impact on your credit history, and it becomes a drawback if not managed well. As a borrower, you must avoid it. But, if you have no other option, do take the right steps to improve your track record.
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