Does loan settlement affect your CIBIL Score

The world of personal finance can feel confusing, especially when it comes to credit scores and how everyday financial decisions affect them. Many people are unsure about how actions like loan settlements impact their CIBIL Score. If you are wondering whether settling a loan can affect your score, you are not alone. The answer is yes—loan settlements do impact your CIBIL Score and may lower it initially. However, this does not mean your credit profile is permanently damaged. With the right steps, disciplined repayments, and smart credit habits, you can gradually rebuild your score and regain your financial confidence.

Before you can understand loan settlement impact on CIBIL Scores, you need to understand what a loan settlement is. A loan settlement occurs when both you and your lender agree to close the loan before the end of its tenure. While this might seem like a convenient way to get rid of debt, it can leave a mark on your credit.

When a loan is settled, it is typically marked as such in your credit report, indicating that you did not repay the initially agreed-upon amount in full. This ‘Settled’ status can lower your CIBIL Score because it suggests you were not able to fulfil your credit obligations completely. There are some strategies that you can adopt that can help you mitigate the impact of loan settlement and effectively improve your score over time.

Improving your CIBIL Score post-settlement is not as daunting as it sounds. The first step is to ensure that all your remaining loans and credit card bills are paid on time. Consistent and punctual payments show that you are responsible with credit, boosting your score.

Another important aspect is maintaining low credit card balances relative to your credit limit. High credit utilisation and maxing out your credit cards can negatively impact your score. Aim to reduce your credit card balances to below 30% of your available limit. This demonstrates responsible credit utilisation and can improve your score.
 

Even if you have settled some loans, you should keep your old credit accounts active. The length of your credit history matters, and older accounts with good repayment history can positively influence your score. Closing old accounts can potentially shorten your credit history and increase your credit utilisation, which may not be in your best interest.
 

Maintaining a healthy credit mix by having a balance of secured loans (like home or auto loans), unsecured loans (like collateral-free personal loans), and credit cards can have a positive effect on your score. Lenders often view a diversified credit portfolio as a sign of financial stability. However, this does not mean you apply for credit products you do not need and cannot handle, just to diversify your credit mix. Doing so multiple times, especially within a short span, can negatively impact your score. Plus, lenders view this as credit-hungry behaviour. Remember to monitor your credit report regularly for inaccuracies or discrepancies. If you find any, report them to the concerned credit information company to get them rectified right away.
 

Finally, it is important to be patient. Improving your CIBIL Score, which is definitely achievable, will take time and consistent effort. Do not expect an immediate rebound in your score after settling a loan. It may take up to a year of responsible behaviour to see significant improvements.