Yes, loan settlement can affect credit card applications. When you settle a loan, it typically means that you pay less than the full outstanding amount, which is reported to credit bureaus and can negatively impact your creditworthiness.
Here’s how it can affect your ability to get a credit card:
1. Lower Credit Score: Loan settlements often reduce your credit score. A lower score can make it harder to get approved for a new credit card or may result in higher interest rates or less favourable terms.
2. Credit Report Impact: The settlement is recorded on your credit report as “settled” rather than “paid in full,” which may be viewed negatively by future lenders, including credit card companies.
3. Perception of Risk: Credit card issuers may see loan settlement as a sign that you may have difficulty managing your debts. This can lead to rejection or stricter conditions when applying for credit.
4. Long-term Effects: Depending on the severity and frequency of such settlements, it could take time to rebuild your credit. Lenders typically prefer applicants with a solid history of repaying debts in full.
How can borrowers deal with this?
Borrowers see the loan write-off as an opportunity to pay less for the closure of the loan account. However, most borrowers are not aware of the inner calculations and consequences of such a settlement. One wrong step may bother borrowers for about seven years i.e. as long as credit rating agencies hold the information in their repository. Until and unless you don’t have a bother option, do not get swayed by the one-time loan settlement option offered by lenders.
If possible, choose to liquidate your savings or investments to pay off the outstanding loan amount in full. Think of any other possible methods to raise money enough to close the loan account. It is recommended to consider ‘settlement’ as the last resort. In addition, you can try requesting the lender to extend your repayment term, re-evaluate the monthly instalment structure so it is easier for you to make monthly payments, reduce the interest rate, or at least waive off the interest for as long as possible.
Once you strike a deal with the lender, make sure to verify the changes that happen on your credit report and credit score. Maintain a good credit score and behaviour, and try to make up for any dip in your score. To further avoid such situations, you can go for a secured loan rather than an unsecured one so the lender will not have to be wary of your repayment capabilities.
Alternatively, you can also take an insurance policy against the loan. In this case, even if you come across a tough situation where you cannot repay, the insurance does the needful for you. Therefore, you will not default on payments and it won’t affect your credit score.
To improve your chances of getting approved for a credit card after a loan settlement, it’s important to work on improving your credit score and maintaining good financial habits over time.
