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You’ve always been cautious about your financial health, balancing responsibilities and goals while managing debt
As your debt rose, you became more careful and started to save every month to clear your debts.
Life doesn’t go as planned, right?
When life threw an unexpected curveball with your friend’s accident, you did what any good friend would do—helped, even if it meant tapping into your savings, which was meant for debt clearing.
Since you do not have an emergency fund, you decided to solve the emergency as soon as possible by using the money you saved for the time.
Meanwhile, your loan is due, and you do not have much money to close immediately. So, you settled the account with partial repayment at the negotiated amount, thinking that your CIBIL score would not be affected because you were paying partially without any late fee.
After a few days, you were low on cash and considered taking a personal loan for the time being. So you check your Cibil score. Your eyes widened, and your jaw dropped.
Your CIBIL score has dropped to 694, a significant decline from 743.
Now, you’re left confused, wondering what went wrong. After reviewing all your transactions for missed payments, you find that everything appears to be in order.
Like you, several loan borrowers also do partial settlement, hoping their CIBIL score will remain the same or improve.
However, this partial settlement is never good for your credit health because it will show lenders that you were not able to close the entire loan, which will have a negative impact.
Now you might be wondering, What would be the solution to improve the CIBIL score after loan settlement?
Well, we are here to briefly explain how your CIBIL score is affected and what you can do to improve it over time. Before that, let’s understand what a CIBIL score is and how it affects your financial health.
The CIBIL score is the credit score that determines whether you are worthy of obtaining credits. It ranges from 300 to 900.
The CIBIL score is recorded and reviewed by Credit Information Bureau India Limited, which is the credit rating agency that determines the credit score by evaluating both secured and unsecured loans.
CIBIL score is evaluated based on your credit history. It is updated every month based on your credit activity.
The financial institutions and other banks evaluate your CIBIL report when you apply for a bank loan or a personal loan. A better CIBIL report has a higher chance of loan approvals at a better interest rate.
The higher your score remains, the more likely you will be able to increase your loan limits and improve the approval process. This credit value is solely based on your credit history.
Here is a detailed overview of how much your credit score determines your creditworthiness.
| Credit score | Credit-worthiness | Loan Approval Chance |
|---|---|---|
| Above 790 | Excellent | Very High |
| 771-790 | Good | High |
| 731-770 | Fair | Moderate |
| 681-730 | Average | Low |
| Below 681 | Poor | Less likely |
In general, improving the CIBIL score is a process of disciplined financial management with a strategic approach.
After a loan settlement, the CIBIL score is bound to decrease due to the failure of closing the account. This could impact your credit health in the future if it doesn’t improve.
Moreover, a small financial misstep—such as missing a payment, defaulting on a loan, or maxing out your credit card—can negatively impact your credit score, making future borrowing even more difficult.
Your credit score highly influences the loan approval time, interest rates, and other factors. As a result, a good score ensures faster processing times and allows you to access higher credit limits with low interest rates, giving you more financial flexibility.
Improving the credit score and maintaining the CIBIL report at the higher levels are two different things. Ultimately, achieving these two things is critical to becoming creditworthy. Improving and maintaining CIBIL scores relies on how much you repay as well as your credit activity after repaying the settlements.
Here are some steps that you can follow to improve and maintain your CIBIL score after loan settlement.
Close your loans instead of settling them to improve your CIBIL score. A settled account shows that you only repaid a portion of the amount due to financial difficulties, which shows up as a negative thing in the CIBIL report because you were unable to repay the debt in full.
This shows the future ledgers that you are not able to repay the entire debt. Banks and financial institutions may hesitate to approve new loan applications because of this. Even if the new loans are approved, they will most likely have high interest rates.
However, on the other hand, a closed account shows that you are a responsible borrower as you fulfil loan obligations. It also helps to increase the chances of getting future loans with better interest rates.
Your CIBIL score is severely affected when you delay in making payments. One late payment can reduce your creditworthiness from good to average.
Ensure your bills are paid on time and avoid any penalty. Even the slightest misconduct will be recorded in your CIBIL report, which can affect your credit status in the future.
Regular and timely payments, irrespective of loans and credits, will help to improve your credit score. Paying bills on time is another excellent way to achieve debt relief. Whether it is a small credit bill, an EMI, or a loan, make sure that it is paid on time to avoid defaults.
A credit card or a personal loan wallet always has a maximum limit that you can use up to. Exhausting this limit can drastically affect the CIBIL score. Credit utilisation is a critical factor lenders check up on. As a result, the CIBIL report mentions your credit utilisation ratio.
Always maintain a credit utilisation ratio between 30% and 40%. However, if you want to improve your credit score, keep your credit utilisation ratio under 30%. When your report shows a lower debt-to-income ratio, you will receive a higher score.
Even though chances for new loans are slim with a low credit score, you can get a credit card. If you do not have a credit card with you, then you can get one by applying for a secured credit card to manage your expenses.
Unlike other credit cards, a secured credit card is offered irrespective of your credit score. However, you need to have a fixed deposit because secured credit cards are issued against fixed deposits. Select a credit card with a favourable limit. Be mindful not to max out your credit limit, as it may impact negatively on your credit report.
Once you claim a secured card, remember that you need to pay off the entire amount before the due date. Regular and timely payments will help you improve your credit score gradually.
Having multiple loans is a setback for the CIBIL score. It shows that the borrower is in the web of a never-ending borrowing cycle. Lenders may become disinterested in providing loans due to your inability to close multiple accounts.
If you have too many loan applications, then try the debt consolidation method. It involves combining all loans into one new loan with a lower interest rate. This activity will help to close several other loans, which can improve your CIBIL score.
Furthermore, it allows you to easily track and pay your loans from a single location.
Do you know that the type of credit and loans you take also impact your credit scores? Yes, you heard it right. There are two types of loans: secured and unsecured loans.
Secured loans are loans that are secured by an asset. Auto and home loans are secured loans. Unsecured loans, on the other hand, have no collateral. Personal and education loans, for example, are unsecured because they do not have any collateral. Unsecured loans are approved after analysing the CIBIL report.
A balance of secured and unsecured loans is good for a strong credit profile. Because having too many unsecured loans can negatively affect your credit score. Also, having a high number of debts on one secured loan also causes your credit score to decrease.
When you settle or close a loan payment, you should not immediately apply for a new loan right after the settlement.
Applying for new loans right away indicates that you are desperate for more money. Furthermore, rejections from multiple loan applications increase the risk of a low CIBIL score.
Lenders reviewing your credit report may feel disinterested in providing new loans, as they will see you as a high-risk borrower, leading to loan rejections or higher interest rates on approved loans.
Every new loan application results in a hard inquiry. Too many requests for new loans will indicate that you are in financial distress, increasing the likelihood of loan rejection.
An NOC is a No-Objection Certificate, a document that confirms a loan amount has been fully repaid. This document is created to prevent any legal dispute between the lender and borrower in the future.
NOC certificates are also recorded in the CIBIL report. A properly closed account receives an NOC, which can positively improve credit score. NOC indicates that the loan is fully repaired, resulting in greater trust from lenders and increasing the chances of loans getting approved in the future.
When the CIBIL score is lower, borrowing becomes difficult as lenders lose their trust. The chances of low-interest loans are very low. However, you may get approved for unsecured loans with high interest.
You may believe that high-interest loans are advantageous to you given your financial situation. Let us remind you that high-interest loans can deplete your income significantly. So make sure you get the right kind of loans to improve your financial condition.
Your credit score impacts your loan and credit approvals in numerous ways. Your CIBIL report is thoroughly examined by the relevant financial institution when you apply for bank loans and personal loans.
A good CIBIL score estimates guaranteed loan approvals with the best interest rates. However, a poor CIBIL score can impact loan approvals in numerous ways.
Here is what will happen if you have a low CIBIL score:
No, you cannot improve your CIBIL score immediately if you have attempted late fines and other defaults. Improving the CIBIL score is a long process of making informed financial decisions regarding credit and debt.
Your CIBIL score can be gradually improved based on your credit activity. You can improve your CIBIL score by practicing the above-mentioned methods regularly. A consistent and disciplined plan may help you improve your CIBIL score effectively.
There is no quick fix to improving your CIBIL score, as it is updated monthly based on your financial activity. To establish creditworthiness in the eyes of lenders, you must consistently make timely payments over an extended period.
Building and maintaining a strong credit score requires financial discipline, responsible credit usage, and regular monitoring of your credit report. Use a mix of right loans that have a low interest rate and a better limit.
Improving your CIBIL score after settling a loan can be difficult, as it records that you failed to close your pending loan. Loan settlement has a negative effect on your credit history even if you settle your loan at the right time.
Once your CIBIL score becomes low, it won’t come back up as quickly as you want. It requires disciplined financial habits and consistent effort to maintain and improve the CIBIL score. A low CIBIL score can harm your credit report, leading to rejections from new loans and approval of only high-interest loans. This can further harm your financial condition. So it is crucial to practice disciplined financial habits to improve your CIBIL score.
Start with closing your accounts as soon as possible instead of settling. Then regularly pay the bills before they are due, and also utilise your credit ratio efficiently to prevent maxing out. When you close your loans, do not immediately apply for new loans, as it will show you are hungry for more cash.
Following a structured plan for improving your credit health will allow you to gradually transform your credit report. Remember, it’s a gradual process, and with patience and responsible financial behaviour, you can reclaim your creditworthiness and improve your chances of securing loans in the future.
Disclaimer: The information provided in this blog is for educational and informational purposes only and should not be considered as financial or investment advice. Stock market investments are subject to market risks, and past performance is not indicative of future results. Readers are encouraged to do their own research and consult with a licensed financial advisor before making any investment decisions. The author and publisher are not liable for any financial losses or damages incurred from following the information provided in this blog.
Hashim Manikfan
Hashim Manikfan is a professional financial content writer with extensive experience in creating engaging and informative articles on a wide range of financial topics. With academic background in Communication and Journalism, Hashim has published numerous articles aimed at educating readers on essential financial principles. His work covers areas such as financial markets, investment strategies, economic trends, and more. His writing style ensures complex topics are accessible and interesting, making financial literacy attainable for a broad audience.
