How does “settled” in your credit report impacts your credit score

Credit score is one of the most important factors that lenders consider when approving your loan or credit card application. It is computed based on different factors that make up your credit report such as your repayment history, past credit behaviour, etc.

Good repayment track record, fewer credit enquiries, low credit utilization ratio, balanced credit mix, etc. are various factors that help build and maintain a good credit score. Whereas, terms like “settled” or “loan settlement” on your credit report can severely hamper your credit score.

Whenever you get a credit report, you should check whether your report contains the word “settled” against any of your loan or credit card accounts. Any “settled” account can severely hamper your credit score. Read further to find more about what does the word “settled” mean on your credit report, how loan settlement works, how does “settled” in your credit report impacts your credit score along with a few ways to deal with the problem and build good credit after loan settlement.

To know your creditworthiness and avail credit benefits, you can check CIBIL score online for free from the credit bureau’s website or various credit platforms.

What is Loan Settlement and How Does it Work

In case you find yourself stuck in a dire financial situation due to unforeseen circumstances such as an accident, illness or loss of employment, etc. and are unable to make your loan repayments in full and/or on time, you may need to approach your lender regarding the same.

You may either request some extra time to make the loan repayments or a one-time settlement (OTS) option where you and the lender may mutually agree to “settle” the loan. The lender may, depending on the genuineness of the situation, offer you a 6-month non-repayment period followed by a one-time settlement option or may write off a certain amount so that it is easier for you to settle the loan.

However, as this settlement amount is lesser than your entire outstanding loan amount, the status of your loan is marked as “settled” in your credit report which has a negative impact on your credit score.

Impact of Loan Settlement on Credit Score

The word “settled” in your credit report usually hurts your credit score as it shows an inability to pay your debts in full and/or on time. Moreover, it can remain on your credit report for up to seven years.

If you (the borrower) enter into a one-time settlement with your lender, it indicates that you accept that you are incapable of repaying your loan in full. The lender shares this information with the credit bureaus and the loan account is shown as “settled” instead of “closed” in your credit report which impacts your credit score negatively. Unlike a closed loan account, a “settled” account indicates a risky credit profile and lower creditworthiness which lowers your credit score and may make it harder for you to secure new credit in future.

The “settled” status of your loan account along with a lowered credit score may make lenders reluctant to give you a loan in future. Even if you are able to secure credit, it may reduce your chances of securing a loan/credit card at competitive interest rates, for the desired amount and tenure.

How to Build Good Credit after Loan Settlement

In case you have opted for loan settlement, you can work towards improving your credit score, which may take some time, generally between 12 to 24 months. Given below are a few key ways that may help you improve your credit score after loan settlement:

• Pay off all your dues
• Refrain from making credit enquiries
• Try to maintain a low credit utilization ratio (preferably lower than 30%)

Do keep in mind that though a one-time settlement may seem as an opportunity to pay a lower amount, it should be used only as the last resort. Borrowers should try their best and think of options that could help them pay off the loan amount in full such as liquidating their savings or investments like fixed deposits, gold ornaments, etc. to pay off the loan or try and request the lender to extend the repayment tenure, waive off the interest component or get their monthly installments restructured.

Conclusion

While a “settled” credit account can make it difficult for you to get access to credit soon, you should diligently make repayments and close all your credit accounts as per schedule. A disciplined credit behaviour after settling your account can help increase the trust among lenders in future and make you eligible for credit in future although at their terms.

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