There is an old debt in your account for a long time and the bank offers you a settlement to pay less than you owe. So what do you do? You may be in two minds, where on one hand you would be tempted to pay the settled amount and clear the debt while on the other hand, wait for some time and pay the full amount. People are confused on what effect any of these options may have on their credit score?
Settlement of a debt is when the bank offers you a lower amount than your actual debt in exchange of you making a one-time full payment for the settled amount. It is basically you pay off the amount in one time to have your debt forgiven. Settlement is usually an option for unsecured debts like, credit cards and personal loans where the credit has no collateral backed up and which could be sold off to pay your debt. Since, the creditor has a risk of getting no payment, he goes in for settlement where at least he would receive a smaller one-time payment than no payment at all.
But as tempting settlement can sound due to the lower amount, it does affect your credit score in a negative way. Firstly, it would show up on your credit report as ‘Settlement’. Whenever you pay an amount less than what you owe, it does hurt your credit score and credit history. In addition to all that, a ‘settlement’ on your credit report looks bad to potential lenders in future as it shows a history of not paying off what you owe.
But if you already have missed payments and your debt has been taken over by a collection agency, then your credit score already has been damaged. Taking a settlement would further have little or negative effect on your CIBIL score.
Full Payment is always the best option to eliminate a debt. When you pay off the borrowed amount in full it gets wiped off from your debts. It also affects your credit score positively in two ways- one, by reducing your total debt and other, building a good payment history.
If you are looking for a loan in near future, then settlement would be a very bad option and full payment should be the only option. If you can wait for some time and pay off the debt in full, then that would be very good for your credit score. But, if you think the interests are piling up and there is no way you can pay off the whole amount then settlement is the way for you.
Find out your credit score at www.cibilconsultants.com
Source: Secondary
Settlement of a debt is when the bank offers you a lower amount than your actual debt in exchange of you making a one-time full payment for the settled amount. It is basically you pay off the amount in one time to have your debt forgiven. Settlement is usually an option for unsecured debts like, credit cards and personal loans where the credit has no collateral backed up and which could be sold off to pay your debt. Since, the creditor has a risk of getting no payment, he goes in for settlement where at least he would receive a smaller one-time payment than no payment at all.
But as tempting settlement can sound due to the lower amount, it does affect your credit score in a negative way. Firstly, it would show up on your credit report as ‘Settlement’. Whenever you pay an amount less than what you owe, it does hurt your credit score and credit history. In addition to all that, a ‘settlement’ on your credit report looks bad to potential lenders in future as it shows a history of not paying off what you owe.
But if you already have missed payments and your debt has been taken over by a collection agency, then your credit score already has been damaged. Taking a settlement would further have little or negative effect on your CIBIL score.
Full Payment is always the best option to eliminate a debt. When you pay off the borrowed amount in full it gets wiped off from your debts. It also affects your credit score positively in two ways- one, by reducing your total debt and other, building a good payment history.
If you are looking for a loan in near future, then settlement would be a very bad option and full payment should be the only option. If you can wait for some time and pay off the debt in full, then that would be very good for your credit score. But, if you think the interests are piling up and there is no way you can pay off the whole amount then settlement is the way for you.
Find out your credit score at www.cibilconsultants.com
Source: Secondary
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