How to improve CIBIL score after settlement

Sometimes, despite your best efforts, you are not able to pay back your personal loan or credit card bill. In such cases, the lending institute offers you to settle your loan account by paying a fixed negotiated amount that is lower than your outstanding principal & interest. In this guide, we have listed all the steps you need to take to improve the CIBIL score after settlement.

improve cibil score after settlement

The problem here is that, when you choose loan settlement, it severely affects your CIBIL score. In this post, we will delve deep into the topic of cibil score after settlement and what you can do about it.

What is a loan settlement and how does it affect your CIBIL score?

A loan settlement refers to the process where a borrower pays off a loan amount that is lower than the outstanding loan balance. This situation comes when the borrower is unable to repay the full loan amount due to unforeseen circumstances like job loss, medical emergency, etc.

In such case, The lender agrees to “settle” the loan by accepting a reduced payoff amount and writing off the remaining balance.

A key point to note here is that the lender (Banks & NBFCs) do try their level best to keep the loan alive and recover the whole amount from the borrower. Now a days, they do offer alternative payment schedule or in some cases loan restructuring. Only when all the options fail, the lender offers the loan settlement option.

The key points about how a loan settlement affects your CIBIL (credit) score are:

Impact of Loan Settlement on CIBIL Score

  • A loan settlement negatively impacts your CIBIL score, typically resulting in a significant drop of 75-100 points[1][2]. This is because the lender has to write off the remaining unpaid loan amount as a loss, which is seen as negative credit behavior by the credit bureaus.
  • The loan account will be marked as “settled” on your credit report, which stays for 7 years[2][3][4]. Lenders view a “settled” status negatively when you apply for any new loan/credit during this period.
  • It indicates that you were unable to fulfill your credit obligations as per the original loan contract[5]. This raises red flags for lenders about your creditworthiness and repayment capabilities.
  • You may face difficulties getting new loans/credit cards approved, or may get approved but at higher interest rates due to the associated risk[2][3].

Key Differences of Loan Settlement from Loan Closure

  • In a loan closure, you repay the entire outstanding principal and interest amounts as per the original repayment schedule[3]. This does not impact your CIBIL score negatively.
  • A loan closure indicates that you are a responsible borrower who honored the credit agreement[2]. It can even improve your score if you had a good repayment history.

So in summary, while a loan settlement provides temporary relief by reducing your debt burden, it comes at the significant cost of a lower CIBIL score for 7 years, making it harder to access new credit at favorable terms during that period[2][3][4][5]. Loan settlement should only be used as a last resort after exhausting all other options to repay the loan in full.

How to improve CIBIL score after Loan settlement

Here are the effective steps to follow to improve CIBIL score after loan settlement:

1. Making timely payments on all of your current credit obligations

This is the most important step you need to follow to improve your credit score. Timely payment to your dues to credit card and loan EMIs is single most important criteria to improve CIBIL score. Especially after loan settlement in your records.

Your last 12 months EMIs need to be regular ( no bouncing or delayed payment) for you to be considered to new loan.

2. Credit utilization ratio

Credit Utilisation Ratio is how much credit you use, as compared to total credit available to you.

For example, let’s say your credit card limit is ₹ 1,00,000 ( 1 Lakh). If you use ₹ 50,000 on an average per month ( and pay bill on time), then you credit utilization ratio is 50% – because 50,000 is 50% of 1,00,000.

To quickly improve and maintain your CIBIL score, try to keep your credit utilization ratio to under 30%. Ideally, keep it between 25-30% per month.

Important: If you have a credit card, use it. Even using zero credit limit has an effect. The CIBIL score will stay same. In simple words, you taking credit but not using it, doesn’t provide any value to future lenders.

To increase your CIBIL score, one of best and fastest way is to use your credit card up to 25-30% of your credit limit and then pay them amount fully on each due date.

3. Credit builder loan

A credit builder loan is a small loan taken to improve your CIBIL score after settlement.

In this process, you take a small loan and make the payment on time and in full to close the loan properly. This is reported to credit bureau and on each such closure, your CIBIL score takes a jump.

4. Getting the status of settle changed

Any settlement of credit is listed on CIBIL for period of 7 years. Now, let’s say you are able to improve your credit score and get a loan or you are able to get funds, then you can get the status of settled loan to ‘closed’.

You need to contact your lender and ask for loan closure amount. Once you pay that amount, then you will get NOC letter from the lender, which you can send to CIBIL to update your records.

More sources you can use to research:

Frequently asked Questions related to CIBIL Score after settlement

What happens to your CIBIL score after settlement?

When you choose the option of the loan settlement, this is reported to CIBIL. An entry of loan settlement leads to a deduction of around 75-100 points from your CIBIL score. Also, this record stays in your report for 7 years.
Also, till the time the record of loan settlement is there in the borrower’s CIBIL report, no lending institute will approve any loan to such borrower.

How can I increase my CIBIL score after settlement?

To increase your CIBIL score after settlement, you need to follow the following steps:
– Apply for a secured credit card and make sure to pay all your future bills on time(before due date).
– Use around 25-30% of your credit limit and make all the bills before due date.

Can we take a loan after settlement?

No. When you settle any loan, it is reported to credit rating agencies and thus it shows on your CIBIL score too. Till the time loan settlement is there on your account, the new lender will choose not to process your loan application.

How long does it take for credit score to go up after settlement?

It takes one to two years (12 – 24 months) after loan settlement for the CIBIL score to go up. That too, only when you take steps to improve your CIBIL score.

How to improve CIBIL score after credit card bill settlement?

First get a small credit builder loan and pay it on time and complete to close the loan properly. This will improve your CIBIL score.
Also, when you have enough funds, try to get your status changed from ‘settled’ to ‘closed’. You need to connect to your credit card company for the same. If the bill is too high for your pay in one go, have a word with customer care to plan a payment plan. Do not use your card till your bill is fully paid. Once the bill is paid, get your credit card company to report the card as closed.

CIBIL score – download your report here

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