A CIBIL score is a three-digit number ranging from 300 to 900 that assesses your ability to repay the borrowed amount. Lenders consider it when granting you a loan or a credit card because it indicates your repayment history. If you have chosen to settle your home loan due to unusual circumstances, your CIBIL score may suffer as a result. This can harm your creditworthiness and make it difficult to obtain consumer debt products in the future.

That is why, regardless of your financial needs and shortcomings, it is critical to know how to improve CIBIL score after settlement. A good CIBIL score ranges between 700 and 900, indicating that you have been a responsible borrower.

What Is a Loan Settlement?

When a loan borrower is unable to repay the loan in full due to unforeseen circumstances, the lender and borrower negotiate a lower amount to be paid, after which the loan is referred to as "settled". This is regarded as a loan settlement. The term should not be confused with "loan closure", which means that the loan and interest are fully paid off within the specified time frame. Typically, the borrower is only required to pay the principal amount, with all outstanding interest waived.

How Does a Loan Settlement Affect Your Credit Report?

As is obvious, the lender incurs a loss in such settlements, which is recorded with the lending institution and the credit bureau, resulting in a negative impact on the borrower's overall CIBIL score. In such cases, your credit score typically drops by 75-100 points and is reflected in your credit report for 7 years, potentially limiting your ability to obtain a new loan in the future.

How to Improve CIBIL Score After Settlement?

Follow the below mentioned steps to see how to increase CIBIL score after settlement:

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Pay off all your outstanding loans: To reflect a positive history on your credit report, you must pay off all outstanding debts, credit bills, and EMIs on time. Credit card balances have a negative impact on the CIBIL score. You must be cautious not to let irregular or late payments harm your credit score any longer.

Don’t completely exhaust your credit limit: Your credit utilization ratio is the amount of credit you are using compared to the total credit available to you. The total amount of credits used does not exceed 40% of the total amount. If you have an available credit of INR 50,000, you should not spend more than INR 20,000 per month to improve your CIBIL score. This demonstrates that you are financially disciplined, which will reflect positively on your credit report.

Don’t enquire about loans too frequently: Following the loan settlement, make sure that you do not make any additional credit inquiries that may suggest your desire to incur additional debt. Every time you apply for a loan or credit card, the lender will perform a hard inquiry on your credit report, which can negatively impact your CIBIL score.

Get a secured credit card: If you do not already have a secured credit card, you must apply for one. Even though your loan was "settled”, you still have credit limits that you must use wisely in order to significantly improve your credit score. Paying off all of your outstanding debt with credit will increase your credit score quickly.

Track your CIBIL Report status: Keep track of your credit score to see how much you're improving and notify the credit bureau if there are any discrepancies. Informing the bureau of any discrepancy could quickly increase your credit score.

Must Read: Smart Tips to Improve Cibil Score

Conclusion

Because loan settlements have a negative impact on your CIBIL score, you should always try to avoid them. Following the simple steps above to change your status from "settled" to "closed" can significantly help you with how to update CIBIL score after settlement.

SMFG Grihashakti offers home loans up to INR 5 crores with a host of different features, attractive interest rates and a flexible and comfortable tenure of up to 30 years.

We, at SMFG Grihashakti, provide a 100% paperless and online application process which can be completed from the comfort of your home. We also provide our free to use digital tools like the online home loan eligibility calculator and online home loan EMI calculator. We also offer low interest rates starting from only 9.5%* for salaried individuals, which allows for a very seamless experience. To apply for an online home loan, visit us at SMFG Grihashakti.