Understanding Credit Card Settlement: A Step-by-Step Explanation

Credit cards are vital financial instruments that must always be used wisely. They are incredible tools in your time of need, but they can also feel like a handful if you use them heedlessly. Sometimes, people can take more liberty using a credit card than they should. Credit cards allow you to buy as much as you want, but if you spend too much, you fall prey to huge debts, and your credit score also gets affected. 

Credit card settlements assist you in several ways when your debt has become too large to pay off. Explore the guide below to understand how these settlements work and how they can assist you in the long run. Also, check CIBIL score frequently to improve it with time. 

What is Credit Card Settlement?

Credit card settlement is your mutual agreement with your credit card issuer or bank whenever you have high dues. The agreement occurs for several reasons, from reckless expenses on credit cards to financial emergencies. Whatever the reason, you will be advised to either pay in lumpsum and get a complete waiver or request a settlement. 

Credit card settlement is generally done in extraordinary cases, and it is not an option encouraged by credit card issuers. Also, the percentage of credit card settlement depends on your ability to negotiate the amount and your credit card issuer. 

Effects of Credit Card Settlement on Credit Score

A credit card settlement reflects that you have been financially irresponsible and could not repay or manage your credits. So, you can check the CIBIL score app and review your report to see how it is negatively affected. The credit card settlement will reduce your credit score drastically and can also remove any chance of you getting any credit in the future. Several years will be needed to recover your CIBIL score and remove the black mark caused by the settlement. Such a mark lasts a minimum of up to seven years. 

Process for Initiating Credit Card Settlement

Follow the below steps to begin your credit card settlement and resolve your dues. 

  • Reach out to your bank or visit any debt settlement agency. 
  • Explain your inability to repay your debts through a credit card settlement letter.
  • Mention that you want to negotiate your repayment terms in that letter. 
  • You may be offered the choice of a lump sum payment. If not, then file for bankruptcy through a different process. 
  • Your bank or credit card issuer can deny or accept your credit card settlement. If your letter gets approved, you are offered a repayment plan based on your current income.

Alternate Options for Credit Card Settlement

Explore other options instead of credit card settlement before you make a decision. Below are some of the other options you can discover alternatively. 

Check for Alternative Credit Sources

Another option other than a credit card settlement is borrowing credit from other sources to pay off your debt. Get a top-up home loan, borrow a personal loan from the bank, or get a loan to bring yourself out of the debt trap. Also, check CIBIL score in any case to see how it gets affected over time, even when you choose an alternative over the settlement. A personal loan is a better option because the interest rate will be lower than any other credit, and you can clear off your dues with additional time. 

Credit Card Balance Transfer

Choose to transfer your balance from one credit to another if you have too much unpaid balance on a single credit card. It helps when your other card has either a lesser or no interest rate on any unpaid amount for a specific period. The option is offered, and your interest is charged after this period. So, it is a great choice if you can clear your debt within the predetermined time your other card issuer gives you. Some banks even allow you to turn your transferred balance into EMIs if you cannot repay your bills within a specific time. 

Conclusion

Credit card settlement is useful as a last resort when you want to pay off all your debts. However, it is not a great option; you must avoid reaching this point. It affects your credit score and report on the CIBIL score app and makes it challenging to escape your debt trap. So, pay your credit card dues on time and improve your credit score. This way, you are unaffected by the debt at once and can maintain good financial health.


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