How to Improve Cibil Score After Settlement

How to Improve Cibil Score After Settlement (2022 Updated)

What is a CIBIL score and what is a good CIBIL score?

1. A CIBIL score is a three-digit numerical value that shows the creditworthiness of an individual. It is based on the consumer’s credit history and worthiness. 

2. Transunion CIBIL was previously known as Credit Information Bureau (India) Limited. It was founded in the year 2000 and is India’s leading credit information company with information about customers' borrowing records.

3. Credit history reflects the borrowing and repayment history of an individual's loan and debts. It has a score between 300 and 900.

4. Banks and other financial institutions regularly share the CIBIL information with CIBIL based on the customer’s borrowing and repayment records, which are reflected in the customer’s CIBIL report. 

5. A good CIBIL score is generally above 750. It means that the individual has an excellent track record in the repayment of their loans. All installments are paid on time or before time, and there are no delays or defaults in repayment.

6. A credit score between 300 and 500 means that the borrower has a poor record in repaying their debt

How To Update CIBIL Score After Settlement

An individual who has defaulted on their loans may have come to an agreement with the banks or other financial institutions to settle their dues.

The situation, mainly, may arise if the borrower, who has borrowed, is not in a position to repay because of a job loss or losses in a business for which they have taken a loan.

This means that they repay the dues and prepay an agreed percentage, say 70 to 75 percent (estimated), and the bank writes off the balance dues. This is subject to the borrower paying off the balance amount. A no-dues certificate should be insisted upon after the dues are paid.

Ways to improve credit score post settlement

Establishing a good credit history

An individual should, in the future, pay all their loan installments on or before the due date. This may be installments on two-wheeler or three-wheeler loans and loans for electronic items like a television or refrigerator.
 
EMIs on housing loans, if pending, should be repaid on time.

This will help in improving your credit history, thus reducing your previous bad credit record.

Clear all previous dues

While settlement may have been done on the major loans, there may be dues pending on credit cards or other small loans. Credit card balances can affect the credit score of the borrower.
 
Clearing all previous dues will help in improving the credit score. Delaying paying the outstanding amount will reduce your CIBIL score.
 
Manage Credit Cards

An individual may hold too many credit cards and may not be keeping track of all the cards. Some of these cards, though unused, may incur annual maintenance charges, which the customer may be unaware of as they are not using the card.

As the maintenance charges will be shown as unpaid, this will reflect adversely on their credit score.
 
Buying numerous credit cards, which are offered randomly by the banks, also impacts the CIBIL score though you may not use them all.
So all old cards should be checked and cards that are not being used should be cancelled without delay.

However, old credit cards, which show a good payment history should be retained as they can be used to raise money in the future.

Apply for a secured card

If a person does not have a credit card, they should apply for one. Then the amount due on the card should be repaid before the due date. This will improve their credit score, and improve their chances of getting loans in the future.

But, in case they find it hard to secure a credit card, a secured loan will be granted by a bank against a fixed deposit. A secure loan amount of up to 90 percent of the fixed deposit will be granted.
 
Repaying the installments of the loan will improve the credit score of the borrower.

Credit utilisation ratio

The lower the amount you spend on your credit cards, the lower your credit utilization ratio will be. This will boost your credit score, helping you to raise the amount needed in the future through borrowings.

An individual may have a total credit limit of Rs. 1 lakh on their credit card. They should take care that they do not spend more than about 30 percent of the sanctioned limit, that is, Rs. 30,000 in this case.
 
Do not seek fresh loans

After the settlement is made, care should be taken that no fresh loan requests should be made. Effort should be made to improve the CIBIL score. A loan rejection can bring down your CIBIL score drastically.

Go for secured loans instead of unsecured loans

Secured loans should be preferred over unsecured loans because they are generally cheaper. Also, it may be harder to get unsecured loans.
 
Secured loans can be taken against property. If possible, a guarantor or co-signer should be sought for the loan to help get lower interest rates.

Secured loans have a positive impact on one’s CIBIL score while unsecured loans have a negative effect, as secured loans are secured for physical, appreciating assets while unsecured loans are given for depreciating assets or for expenses.

While unsecured loans cannot be totally avoided, they should be limited to 20 percent of the total loan amount.

Use your credit limits

A person may be hesitant to use their credit card or take a loan because of their past problems. However, not using their credit card will mean that they are unable to improve their CIBIL score.
 
The card should be used within the limits and due payments should be made without fail on the due date. Paying the bill on the due date will improve a person’s CIBIL score.

Take a non-objection certificate from your previous borrowers

When we are settling a loan or a debt, it should be ensured that a NOC (no objection certificate) should be taken from the credit card provider or the bank.
 
When you have such a NOC, it is a clear sign that the cardholder or borrower has a clean chit from the bank or credit card company.
 
The NOC should be obtained within 45 days of the closure of the loan.

Factors that affect the CIBIL score

Past credit history

A person with no previous credit history will have a low or nil CIBIL score. This is usually in the case of newly employed people who have not used any credit. A newly employed person should build their credit score by using credit cards and repay debts by paying them on time.

Repayment history

A person who makes their credit card and loan installments on time will have a good CIBIL score. On the other hand, delayed payments and defaults will reduce the CIBIL score. So it is essential to make sure that all payments are made on time.

Utilization of credit limits

The less you use your credit limits, the higher your CIBIL score will be. This means that you have surplus income over expenses and so you do not need to use credits.

So, although you have a high credit limit on your credit cards, it is advisable to use only about 30 percent of the limits as it will push up your credit score.

Debt repayment term duration

The longer the loan duration, the higher the CIBIL score will be. So long-term loans of 10 to 15 years that have a longer repayment schedule will give the borrower a higher CIBIL score than a shorter loan tenure. 

Higher percentage of unsecured loans compared to secured loans.

Secured loans are given against physical assets and are given for assets that appreciate in value. Unsecured loans and credit card loans are given for creating assets that depreciate in value like two-wheelers or four-wheelers or for personal expenses like vacations.

Unsecured loans should be kept to a maximum of 20 percent of the loan portfolio as it reduces the CIBIL rating.                  

Guarantor of loans taken by other persons

Though an individual may have an excellent record of borrowing, problems may arise if they stand guarantee for other persons and the concerned person defaults in making payments or commits frauds.

This will have a negative impact on the CIBIL score on the person giving the guarantee on behalf of the borrower.

Error in your CIBIL report

It is necessary to keep checking your CIBIL score at regular intervals. At times, due to improper or wrong reporting—as banks or institutions have a huge load—it may happen that repayment of installments or loans may go unreported, resulting in a lower CIBIL score.

The concerned bank should be consulted and the discrepancies cleared. 

Why is it important to maintain a good CIBIL score?

Maintaining a good CIBIL score is essential for the following reasons:

• A good CIBIL score will qualify a person for taking loans. A high credit score means that you have a good track record of repaying debts. The banks will then usually process loans to such persons without hesitation as there is very little risk of the person turning into a defaulter.

• A high CIBIL score will give you access to lower interest rates as the lender is confident that you will be able to repay the debt on time. 

• A good CIBIL score is a tremendous plus factor in your visa application for overseas travel. A person who has a low CIBIL score may be stopped from getting a visa due to defaults in payments.

• Even if you do not require any funds in the short term, it is advisable to keep a good CIBIL score. This will help in the future when you may need various loans like home loans, vehicle loans or child education loans. This will ensure that your loan applications are processed quickly and without fuss.

• A high CIBIL score will make it easy to obtain credit cards with higher credit limits. The interest rates on the credit cards will be also low due to the excellent record of the borrower.

Frequently Asked Question

Q1. Does settlement affect the CIBIL score?

A settlement affects the credit score of the borrower adversely by nearly 100 points. The record is kept in CIBIL for 7 years and any fresh loans are liable to be rejected.

Q2. How much time will it take to increase CIBIL score?

It takes a minimum of six months and a maximum of one year to increase your CIBIL score. This is subject to the condition that all payments are done on time. This is because it takes the lender a period of 45 days to send the payment details to CIBIL.

Q3. Is settlement good for credit?

A loan settlement is not good for credit, as it can reduce your CIBIL score by nearly 75 to 100 points. The borrower will find it difficult to get a new loan as the lender is hesitant because of the borrower’s past defaults. Also, it is reflected for 7 years in the CIBIL report of the client.

Q4. What happens after the settlement of the loan?

After the loan amount is settled, the bank writes off the unpaid debt as a loss or bad debt in its books. The borrower is no more liable to repay the amount due. 

The recovery agents of the bank will stop harassing the borrower. Also, there will be no more transactions between the bank and the borrower after this settlement.

Q5. How do I clear my credit card settlement?

The settlement status of the credit card should be changed to closed. This can be done by repaying all the dues outstanding fully. A closed credit card will not affect your CIBIL scores, unlike a settled credit card. Lower repayment amounts can be agreed upon with the mutual consent of the lender and enable closing of the credit card dues.

Q6. How can I increase my CIBIL score from 700 to 750?

This can be done in the following ways:

1. Do not delay payment of any EMI or installment, even by a day.
2. Do not use more than 30 percent of your credit card limits
3. Do not make any fresh loan inquiries.