May 17, 2025 · 10 mins read
Santosh Kumar
Credit card settlement is a mutual agreement between the credit card holder and the bank/credit card issuer that helps the credit card holder when it becomes too difficult for him/her to keep up with the credit card dues. This might be because of multiple reasons, from actual financial emergencies to reckless expenses on credit cards. Irrespective of which, the conclusion causes too much burden on the credit card holder, and causes severe financial stress since the debt multiplies every month, and there seems to be no way out of it.
In such situations of financial panic, a settlement is proposed by the banks/debt settlement agencies between the credit card issuer and the credit card holder. In such cases, the credit card holder is advised to either opt for a lump sum payment in exchange for a complete waiver or directly request a settlement.
It must be noted that credit card settlement is done in rare cases, and the credit card issuers do not encourage it as an option for the debtors. There are minimal chances that the credit card issuers will agree to a settlement, unless you make a lump sum payment. Moreover, the credit card settlement percentage depends on the credit card issuer and your ability to negotiate on the amount.
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1: 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.
2: 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.
3: 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.
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A settlement in credit cards involves repayment of the outstanding balance via credit cards. Every month, your credit card issuer generates a statement including your transactions, due dates, outstanding balance, and minimum payments.
As a cardholder, you must pay by the mentioned due date. Any payment failure incurs interest charges and late fees. A cardholder can make the minimum payment or pay the whole amount. When you choose a minimum payment, it results in added interest in your remaining balance.
Interest will be added if you don’t pay the outstanding balance by the due date. Your credit limit has a critical role to play. When it exceeds the limit, it includes additional charges. So, if you have fallen into debt, it’s time to undertake the following steps for credit card settlement:
You may consult your credit card issuer and request a settlement. In certain instances, your credit card issuer or company might contact you for a settlement. Whichever way you choose, ensure that you discuss everything with the issuer before choosing a settlement for credit cards.
You might also negotiate with the issuer. On certain occasions, cardholders may also reach out to a legal advisor for better negotiations.
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In case you reached out to your card issuer, you need to accept the settlement. The credit manager decides on this depending on certain parameters and circumstances.
Usually, a credit card company rejects the settlement if you have debt to repay in full. If your debt was less and the charges increased due to interest rates, your settlement proposal might get accepted.
You must discuss the amount after your credit card company accepts your settlement. Here, you must negotiate and settle to repay the amount as discussed.
The next step involves giving a written declaration that you and your card provider have settled the dues. That will help avoid forthcoming legal issues that might arise shortly.
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If you settle a credit card debt, does it affect your credit score? Settled debts are always better than unpaid ones. After all, it allows you to reorganise your finances and build your credit score. However, credit card settlement can lower your credit score by 100 points or less.
How much settling credit cards affects your CIBIL score depends on where you are financing at one period. Your account might become delinquent if you fail to make the payment within 30 days of your due date. Missing out on several payments causes the account to be in default. Note that a large debt balance can have a bigger impact on the CIBIL score. Individuals with a high credit score might suffer a massive drop in their score due to credit card settlement.
However, it’s always better for your future lender to know that you made the settlement rather than leaving the outstanding balance unpaid.
If you think you will be using the credit card for several purposes in the future, it's better to choose an instant personal loan to clear your debts. You may consider a balance transfer option for a higher interest rate and switch to another credit card.
But if there are no other options left, you can perform these strategies to improve your credit score after settling credit cards:
1: Pay all your bills on time
2: Never live only on your credit (you may use 30% or less of the available credit)
3: Always review your credit reports from credit bureaus
4: Follow good financial habits each time you make a credit card payment
How long a debt settlement affects your credit score depends on who negotiates the debt settlement with your creditors. If you negotiate the settlement yourself or you pay to use the services of a for-profit company, the settlement notation will remain on your credit report for 6 years from the date your payment is processed. While it affects your score more in the early years, as you work to build up other good credit, over time, it impacts your credit score less and less.
However, non-profit credit counselling agencies have special arrangements with the credit bureau companies whereby we can instruct that the settled debts be removed from your credit report 2 years from when your payment is processed. To learn more about how our debt settlement programs work, contact us for a free, confidential appointment with one of our Credit Counsellors. They can explain the program and see if it might be an option for your situation.
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If you still believe that there is a slight chance for you to get out of credit card settlement, you must try to opt for either of these options
If you have too much unpaid balance on a credit card, you can choose to transfer your balance from one credit card to another. This will help if the other credit card has a lower or no interest rate on the unpaid amount for a predetermined time period (upto 3 months, in most cases). The credit card issuers offer this option and charge interest only after this predetermined interest-free period is over. Hence, this option is suitable only for those credit card holders who can clear their bills within the predetermined time period as offered by the other credit card issuer. Alternatively, for those who cannot repay their bills within the specified time period, some credit card issuers allow users to turn their transferred balance into EMIs.
If the credit card debt becomes too much for you to repay in the given time period, you can borrow credit from some other source to pay your credit card bills. You may borrow a personal loan from a bank, get a top-up home loan, or a gold loan to pull yourself out of the credit card debt trap. You may also seek to borrow a loan on a personal level. This would be helpful as the interest rate on the amount borrowed from these sources is relatively lower, and you will get additional time to clear off your debts.
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Follow these instructions to keep away from landing into such situations that may ask you to opt for credit card settlements-
1: Sign up for the auto-pay feature on your credit card's mobile application/online portal.
2: Set up timely reminders for your due dates.
3: Pay before the time- Do not wait until the last minute to pay your credit card overdues
4: If you are really short of finances, then pay at least the minimum amount due before the last date. The remaining balance can be paid in the interest-free period.
5: You may take a personal loan if you have reached a stage where paying your credit card dues does not seem possible to you, as these loans have lower interest rates.
6: You can request your bank to convert your outstanding balance into easy, affordable EMIs, which you can pay over a specified period of time.
7: As an alternate, you may also transfer your credit card balance to another bank’s account and pay the sum through regular EMIs
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Credit card settlement is basically a mutual agreement between the credit card holder and the bank/credit card issuer that helps the credit card holder when it becomes too difficult for him/her to keep up with the credit card dues.
It should not be okay to opt for credit card settlement in any case. Credit card settlement should be the last option that you choose in case of a huge financial burden.
Whether opting settlement of credit cards is suitable for you depends on your financial situation. Credit card settlement may be a good option if you find clearing your debts difficult. However, a settlement can negatively impact your credit score. Hence, weigh its pros and cons and the alternatives before going for credit card settlement.
Once you opt for the credit card settlement, the issuer treats your credit card account as a default.
While you can't use the same credit card after settlement, you can apply for a new one once your credit score bounces back.
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