We frequently choose to utilise a credit card when we have an urgent financial requirement, mainly due to us not having the funds at that moment. We may also be using our credit cards to meet our monthly bills, which is good as long as we are able to pay the outstanding in full before the due date.
If you carry a balance on your credit card from one month to the next, you’re adding to the cost of your monthly bills, in the form of interest charged on that credit card balance you couldn’t pay off.
And interest charges are no small thing, that’s because interest charges are added to your balance at the end of every single day, and you’ll be charged an interest on that interest from the day before. In other words, the interest on unpaid credit card balances compound, causing your balance to grow in size every day, even when you don’t use your card and before you know you are in a debt trap.
As things worsen, one of the solutions is to ask your bank for a one-time settlement with the anticipation that our bank will forgive the accumulation of the compound interest and charges.
There are many types of loan settlements, the most popular one is one-time settlement, this is when you negotiate a discount of the outstanding debt with your bank or creditors with a one-time payment. Usually, the discount can be 20% to 50% of the outstanding debt, depending on the delinquency of the debt.
Your credit score is a crucial factor that banks use to confirm borrowers’ creditworthiness. To receive future credit from the bank, it is crucial to have a good credit score of 700 points plus. To have a “settlement” entry on your credit file will have an adverse effect on your credit score. This is due to the reason that other creditors who check your credit file, will see that you were unable to fulfil your credit commitment.
If your outstanding debt been delinquent for a long time, then on your credit file against that debt would be an entry that would say “written off”, this entry has a large adverse effect on your credit score. After you have completed your settlement, ensure that the bank update your credit file with the entry “settlement”, this will raise your credit score.
If in the future you are in a position to repay the debt, then we would advice that you contact your bank and negotiate a “full and final payment, on the condition that the bank will remove the “settlement” entry and replace it with an entry “paid in full”, this will boost your credit score.
It is important, when you are negotiating with your bank, that they confirm the arrangements that you both have agreed on an email or letter, so that the bank do not make a “u” turn after you make the payment. Also, it is important that you ensure from the bank or creditors to issue a “No Dues Certificate” (NDC) or a “No Objection Certificate” (NOC) that should be stated on your settlement letter and the credit reference bureaus will be updated with “NIL outstanding” or “Closed”, this will not affect your credit score and in many cases will improve your credit score.
Before you go down the road of a settlement, we would suggest that you first ask your bank if they can convert your credit card debt into a term loan, where you can pay an EMI over an agreed term. This will improve your credit score, as there will be no adverse entry registered on your credit file and you can then clear your total outstanding debt over a fix term.