Let us first understand what the terms CIBIL Score and Settled Status mean. Credit Rating and Information Bureau of Indian Ltd. (CIBIL) describes the CIBIL score as a three-digit numeric summary of your credit history derived using the CIBIL Report (also known as CIR, i.e. Credit Information Report). A CIR is a report of an individual’s credit payment history across loan types and credit institutions over a period of time. A CIR does not contain details of your savings, investments or fixed deposits.
To explain in simpler words, the CIBIL Score is a detailed account of your credit history across every loan type and institutions borrowed over a specific period of time. This credit status is statistically complied and helps lenders ascertain the likeliness of the lender paying back the loan amount.
In India, CIBIL is the statutory body maintaining the credit history individuals and commercial entities. In India, the three-digit numeric summary ranges between 300 – 900, and a score of 750+ is considered good. The higher the credit number, the better the credit standing.
What do you mean by Settled Loan?
What exactly is settled status and how does this feature into the CIBIL Score?
Consider Ravi, who took a personal loan of Rs 5 lakh from a leading bank. He had every intention of repaying the loan within the stipulated time-frame, but, due to certain financial constraints, was unable to pay a part of the loan. Next, the bank offered him a choice of settlement on completion of 6 months of non-payment of dues. This seemed like a good deal to Ravi. He’d already made whatever payments he could, and settling the loan means he’d be loan-free! ‘Settled’ sounds positive and makes him seem responsible. Next, the bank would report a loss and let Ravi off. But, there’s a catch to this settlement.
Ravi was unaware of what impact “Settled” has on his CIBIL Report. When a bank writes off a loan, they report it to CIBIL. While the issue between the bank and Ravi is sorted, CIBIL doesn’t consider it solved. Instead of marking the transaction as “Closed”, CIBIL terms it as “Settled”. And when a loan is settled instead of closed, CIBIL marks it as negative credit behavior resulting in a fall of points in the credit score. The credit score drops by 75 – 100 points. So, while the borrower may be ecstatic he’s off the hook, he’s uninformed of the implications of this one-time settlement.
The borrower should also take into account that CIBIL maintains this record for over 7 years. Now, if Ravi needs to take another loan within those 7 years, the borrowers will likely be wary of him making it extremely difficult for Ravi to get another loan.
What should be done?
If you’re unable to repay the loan amount, do not make settlement your one and only solution. If you can, liquidate an asset or portfolio or try reaching out to your family or friends. Go for a settlement only when completely out of options. You could also try talking to your lender or bank and request them to extend your repayment period, offer you an easier repayment term, or waiver the interest for a certain period.
Once you and your lender or bank have reached a decision, make sure to check your credit rating. As a preventive measure, when you’re taking a loan, ensure that you have a contingency plan in place; especially if it’s a big amount. You can also get your loan insured.
You should keep in mind that no matter how good your current financial situation, once “Settled” shows up in your credit history, banks will be very wary of you. Your past credit behaviour has a long-standing impact, and settling a loan instead of repaying it shows your profile as risky.
If you have previously settled a loan that’s affecting your credit history, you need to do the following. To get your “Settled” remark converted to “Closed”, approach the bank and make the outstanding payment. After this, procure the No Objection Certificate (NOC) from the lender/bank and raise a dispute on CIBIL’s website. Once CIBIL verifies the development, your “Settled” status will be changed into “Closed”.
How to be cautious?
- Be cautious when applying for loans and shopping on credit. Try and avoid hoarding multiple credit cards unless you can manage them with utmost responsibility
- Pay the amount on due time, every time, for every loan and every credit
- Monitor your CIBIL Score continuously. Try and identify any information that can impact your score negatively.
Keeping all this in mind, you can manage your credit much easily. Always remember that your loan-readiness depends on how you have managed your credit. Be responsible and make informed decisions. Most importantly, keep a close eye on your credit score.
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