What is the Credit card Settlement Process? - Kotak Bank

Wise use of a credit card saves money. A credit card is beneficial when you safeguard its use with personal affordability. Credit cards increase spending power and provide the user with various perks; this makes it difficult to refuse. You may be eligible to borrow money without paying interest, unique amenities, and other benefits depending on the credit card issuer (the bank). However, if you don’t make your credit card payment at the end of the billing cycle or pay only the minimum amount required, the outstanding amount will increase. The only way to resolve this will be through a credit card settlement.

Credit card settlement?

When you propose to pay back half of your credit card debt, generally in a lump sum one-time payment, and your creditor accepts it, it is called credit card settlement. It's a process where the lender agrees to forgive a portion of your debt in exchange for a promise from you to pay the remainder; use this as a last option. This settlement process is uncommon among credit card-providing companies. Under unusual situations, they may contemplate rescuing at least a part of their money rather than letting it all go to bad debt. For instance, you have a single credit card debt of Rs. 1,00,000. You might approach the lender and give Rs. 50,000 as payment. The lender offers to forgive and erase the outstanding debt due in exchange for the one-time payment. There are two possible reasons for a creditor to do this. One is that the creditor may be in desperate need of cash and the second reason is they fear that you may not pay the full debt amount back. In both scenarios, the credit card issuer saved some financial loss. Always remember this while beginning to negotiate.

Does it affect your credit score? If so, how?

A credit card settlement process negatively affects and is detrimental to your credit score. A lender will apply a penalty on default borrowers to assist financial discipline. It might take a long time for your credit score to rebound after a major setback.  It is preferable for you first to examine other payment options, such as depleting your funds or enlisting the assistance of family and friends. You should only consider a credit card settlement after exploring all options available.

Credit card settlement process

To start a credit card settlement, follow the following procedures:

  • Explain to your bank your situation as to why you can't pay the entire credit card debt. You may speak with many officials before a credit card bill settlement is reached.
  • Apply for a settlement via a formal letter in which you will again explain in detail why you can't pay the entire debt amount. The lender may decide on a lump sum settlement amount based on the severity of your circumstances.
  • As part of the debt settlement process, provide the whole amount that your lender decides. Instead of taking a single sum payment in specific scenarios, your issuing bank may reschedule your obligation to waive interest. The issuing bank/lender has the discretion to decide the settlement amount and other necessities in the credit card settlement process.

Is it a good idea?

Credit card settlement negatively affects a credit score, and you won't be able to borrow money from your bank for an extended period. Avoid getting into a scenario where you have to negotiate a credit card settlement. It is better to pay the entire bill amount at the end of the billing cycle instead of spending excess and increasing your outstanding debt. Avoid credit card settlements because of the negative influence they have on your credit score.

However, depending on some unforeseen circumstances, one may be forced to settle. Due to this, knowledge about how to negotiate the credit card debt settlement on your own is critical—allowing you to approach the issuer without expenses associated with appointing a debt settlement service.

CONCLUSION

To conclude, you should apply for a credit card only when you are sure you know how to use credit cards wisely for what you can afford and make credit card payments monthly on time. Good financial discipline will help avoid a settlement. If you select the correct credit card and use it appropriately, applying for a credit card is a great idea and can assist various aspects.

REFERENCES

  1. https://www.bankbazaar.com/cibil/credit-card-debt.html
  2. https://www.investopedia.com/personal-finance/debt-settlement-cheapest-way-get-out-debt/
  3. https://www.investopedia.com/articles/pf/09/debt-settlement.asp
  4. https://nomoredebts.org/blog/debt-settlement/how-does-credit-card-settlement-affect-your-credit-score

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.