Loan settlement wrecked your credit score? Here’s how to fight back and win

When you settle a personal loan, it can provide immediate relief from future complications, debt, and legal action. Still, such settlements temporarily dent the borrower's credit score. That is why it is prudent for sensible borrowers to devise a strategic approach post-settlement to try to restore and boost their creditworthiness.

Below are five actionable steps to rebuild your financial profile. It is vital to always keep in mind that a high credit score helps in making future personal loans, credit cards and home loans easier to secure.

1. Check your updated credit report

After settling a personal loan, the first step is to conduct thorough verification. For the same, you should:

• Request and obtain your credit report from your respective credit bureau. CRIF High Mark, CIBIL, Equifax and Experian are bureaus that provide scores. You should check your credit report to ensure the settlement status is accurately reflected.
• Make sure that the lender has updated the loan status as ‘settled’ and not ‘defaulted.’ If there are errors, report them on an immediate basis to avoid dragging negative implications on your credit report.

2. Resume timely payments on existing credit

• Maintaining composure with disciplined repayments is the key to rebuilding trust with lending institutions. To accomplish this, you should clear outstanding credit card dues. Pay pending personal loan EMIs, home loan EMIs or any ongoing loans without any delays.
• To simplify the entire repayment process, set up an auto-debit mandate. So that you never miss due dates and suffer later on due to interest charges and penalties. Problems only occur when planning is inadequate. Be very particular about this.

3. Reduce credit utilisation ratio

• A high utilisation ratio negatively affects your score, even after settlement. That is why you should focus on keeping your credit utilisation ratio below 30%. Ensure that you never apply for multiple new personal loans, credit cards or home loans simultaneously.
• You should formulate an effective strategy to strategically distribute the expenses across existing credit cards. You should also form an emergency fund. This will help you navigate difficult financial times.

4. Consider small, manageable loans

• Responsible borrowing and on-time clearance of bills can strengthen your credit profile. To further improve this, consider opting for a low-value personal or credit card loan. Once availed, ensure that you never miss any due dates.
• When you maintain a fair credit mix, a sensible collection of personal loans, credit cards, and home loans, along with a clean history of repaying them on time for years, this benefits your credit score and overall credit profile immensely, as it is a clear sign of reliability.

5. Monitor and maintain long-term financial discipline

• You should also keep in mind that credit repair is a gradual process, and consistent habits are essential. Reviewing your spending habits, credit report, and pending repayments regularly helps keep you financially disciplined and on the right track.
• In case you face problems in managing your finances, you should consult a certified financial advisor, sit down with a pen and paper and take notes on ways you can use to reduce your dependence on credit, i.e., borrowing, especially during a financial crisis.

By following the above-discussed five steps, aspiring borrowers can not only recover from the temporary dip caused by a personal loan settlement but also enhance their creditworthiness over time, unlocking better borrowing options in the future.

Disclaimer: MintMoney 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 scores. MintMoney 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.