High credit card bill: Why you should avoid settling the dues? Key reasons explained

If you have a huge credit card bill and are now contemplating settling the same with the bank, then you should think again! This could be quite damaging for your credit score. It is worth remembering that ‘settlement’ does not lead to ‘closure’.

When such a transaction takes place, it is reported to the credit bureaus such as CIBIL and CRIF High Mark. And what follows is the poorer credit score.

We spoke to some experts to dig deeper into this. And these are the reasons they shared to avoid taking this route.

I. Drop in credit score: When you opt for settling of dues, it leads to a steep drop in your credit score. This is because when you settle your credit card dues, the same is reflected in your credit report and remains so for a long time.

“When you choose to settle dues with the bank, your account is marked as ‘settled’ rather than ‘closed’ in good standing. This signals that the borrower didn’t fulfil their full repayment obligation. As a result, the credit score takes a significant hit, and this negative remark can stay on your credit report for several years,” says Aalesh Avlani, Co-founder of Credit Wise Capital.

II. Difficulty in securing future loans: As the credit score drops, securing future loans becomes a challenge in itself. “Settling your dues can hurt your credit score, often dropping it by 75 to 150 points, and that red mark can stay with you for a long time. As a result, banks may view the person as a risky borrower, making it tougher to secure new loans (even a credit card). This means you face higher interest rates and tougher conditions,” says Kundan Shahi, Founder, Zavo, a loan repayment platform.

III. What is the alternative? The alternative for most credit card users would be to stagger repayment over monthly instalments or to make an arrangement with the bank for a revised repayment plan.

“Cardholders should consider options like converting the outstanding balance into equated monthly instalments (EMIs), seeking temporary payment relief through restructuring, or working out a revised repayment plan with the bank. These options do not have the same negative impact on your credit history,” says Manish Shara, Co-founder and CEO, ZET.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.