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'Close' Not 'Settle' Your Credit Dues

24-Feb-2017 written by : FSI-Team

If you are stuck in a vicious circle of debt and are struggling hard to exit then possibly an option to "settle" dues with the lender would sound enticing. Don’t ever make the mistake of "settling" loans as its harsh effects will reverberate far into the future.

All your credit related activities are subsequently recorded in your CIBIL report. The information given in your report is used to arrive at your CIBIL score. This score is a three digit number that fairly describes you as a borrower based on the history of your borrowings and thereafter your payments of those.

Thanks to technology, the process of loan disbursement has been simplified over the years. This has amplified the demand for borrowed funds. Sometimes people borrow way beyond their capacities and so they are not able to repay the same on time. They would then borrow additional funds to pay off old debts but realise their situation still remains unchanged. This greatly affects their personal loan eligibility.

When the burden of their liabilities begins to weigh them down, people start looking for trapdoors to make an easy exit. That is the time when quite so many people willingly opt to "settle" their long standing dues and get over with them. Unfortunately, that is not the most prudent choice. Let us take the example of Tulika Sharma.

Tulika had amassed huge debts. She had four credit cards and she was running a large debt on each of them. She also had one personal loan. It had become nearly impossible for her to manage them all. She began making only a minimum payment on two credit cards and stopped making any payments on the other two cards.

Soon after that she started getting calls from the bank's recovery cell. After a few months’ of deliberations and Tulika strictly refusing to pay, the bank agreed to settle her dues of Rs. 1, 50,000 for only Rs. 90,000. Tulika heaved a sigh of relief.

She applied for a top-up loan on her personal loan and used that money to settle scores with the credit card company. She calculated, "two down, two more to go". She used the same trick with the other two cards and eventually wrapped up her entire outstanding debt size of more than Rs. 3, 00,000 in under Rs. 1, 70,000. She wanted to give herself a pat on her back for this. But she didn't realise she was actually drilling a sinkhole in her credit report.

Years passed and Tulika had paid her last standing personal loan of 1.7 lakhs diligently. She was sure her credit score rocked because she did not default on a single payment after that. When Tulika needed some money again, she rushed to her regular bank hoping to get an instant personal loan. But it left her quite shocked that inspite of a fair score she was not eligible for a loan because of "settled" tags in her report.

Those accounts that she "smartly" settled were reported with a “settlement” status to CIBIL. Before lending, banks measure every borrower’s:

  1. Capacity to repay and
  2. Intent to repay.

While they assess one's capacity to repay through income proofs, they examine one's intent to repay by studying their credit past, as listed in their CIBIL report. Flags such as "settled" can be discouraging for lenders. It displays that the borrower has caused lenders to face loses in the past. This can be somewhat off-putting.

If you chose to "settle" your dues instead of paying them off in full then you put your entire financial future in a vulnerable position. The reasons for that are clear. All your "settlements" will be recorded in your CIBIL report. Potential future lenders will certainly view your report before they disburse funds to you. This way they will know for sure of what you have been at in the past.

When we say that you must "close" your debt account we mean that you must pay all your dues in totality, including the principal amount, interest, penalties levied etc. It means you make the full payment of what you owe as per the lender.

Once you have paid all the instalments of the loan you must apply to your bank to close the account. Unless the bank issues a "No Dues Certificate" to you the loan account is not considered as officially closed. This document is very important for you to obtain. It is your sole proof that you have paid the account completely and that there were no pending dues.

Let us for an instant assume that Tulika had closed all her accounts instead of settling them. She would be in a far better position today. She could get loans at her beck and call. She would not have to worry about her report being miserable.

A "closed" remark is viewed favourably by lenders. The respective borrower is considered to be one who is conscientious and responsible. Banks fall over each other to do business with such an individual.

Doubtlessly, "closing" a debt account is favourable while "settling" is not.


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