What is Credit Card Settlement & How Does It Work?

Have you heard of the term ‘settlement of credit cards’? This is an option you can rely on when you do not have the funds to pay your credit card bill in full due to the loss of a job or a financial emergency. 

It involves coming to an agreement with your credit card company where you pay less than the outstanding balance to settle your credit card debt. While it can be helpful in some ways, it can also decrease your credit score, which makes it challenging for you to get access to credit in the future. Opt for it only when you really need to. 

Read on to learn what is credit card settlement, the processes to follow and more.

What is Credit Card Settlement?

Credit card settlement does not mean that you clear your dues in full. Instead, it implies that you as the cardholder pay only a small part of your outstanding balance to the issuer. 

Here are the reasons why you may write a settlement letter for a credit card:

• If you don’t settle your credit card debt, your CIBIL score will continue to fall
• The issuer may initiate legal proceedings against you if you fail to inform them about why you have defaulted on repayment and request a settlement 
• You may not be able to apply for another credit facility until you settle your previous credit card debt

Also Read: Benefits of Using a credit card

Process of Credit Card Settlement

Here is the credit card settlement process you will need to follow to settle your dues:

• Step 1: Contact your credit card issuer or a debt settlement agency
• Step 2: Write a settlement letter for a credit card stating the reason why you are unable to repay the dues (if you have filed for bankruptcy, mention that as a reason)
• Step 3: If you can repay the loan in the future, mention in the letter that you wish to explore an alternative repayment approach (express your willingness to pay a lump-sum amount if you can pay it now)
• Step 4: Wait for your credit card issuer to reply

Note that the credit card companies may or may not accept your settlement request.

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How Credit Card Settlement Affects Credit Scores

The settlement of credit cards negatively impacts your credit score, but not as much as not repaying your dues. In India, the credit card settlement process is quite strict. Your credit report will reflect the settlement for the next 7 years. However, your credit score will bounce back gradually when you repay your other debts responsibly. 

Alternatives to Credit Card Settlement

If you can’t pay the bill in full, opting for settlement of credit cards may be the right option. However, there are some other options you can try to clear your current debt without a significant impact on your credit score:

Credit Card Balance Transfer

By choosing the balance transfer facility, you can transfer your outstanding balance from the existing card, which has a higher interest rate, to another credit card having a lower annual percentage rate (APR). This will help lower your interest rates and ensure you can repay the dues with some financial planning and prioritisation. 

Debt Consolidation with Personal Loan

A personal loan has a much lower interest rate compared to the credit card APR. Hence, you can get this loan to clear your credit card dues and significantly reduce the borrowing cost. Your repayment will also be in EMIs, which can help ease the financial strain caused by a huge credit card debt.

While credit cards have a higher range of interest rates, a personal loan offers funds much more affordably. Hence, you can consider availing of a quick and hassle-free Fibe Instant Personal Loan of up to ₹5 lakhs to clear your dues. These loans come with an easy repayment schedule, which can extend up to 36 months. 

Alternatively, you can opt for the Fibe Axis Bank Credit Card to enjoy added security and up to 3% cashback on your transactions. Download the Fibe App or log in to our website to apply online and enjoy a simple application process.

FAQs on Credit Card Settlement

Is credit card settlement good or bad?

Whether opting settlement of credit cards is suitable for you depends on your financial situation. Credit card settlement may be a good option if you find clearing your dues difficult. However, settlement can negatively impact your credit score. Hence, weigh its pros and cons and the alternatives before going for credit card settlement.

What is the effect of the settlement on credit cards?

Once you opt for the credit card settlement, the issuer terms your credit card account as a default. 

Can I get a credit card after settlement?

While you can’t use the same credit card after settlement, you can apply for a new one once your credit score bounces back.

Does CIBIL improve after settlement?

Once you apply for credit card settlement, your CIBIL score takes a hit. However, you can bring it back up by following good credit practices. Note that it will take some time for your score to bounce back.