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Credit Card Settlement and Its Effects

Credit card settlement could lead to financial stress in the future

Basha Shaikh

18 Feb 2008

Before using a credit card - either to spend on it or to withdraw cash - it is absolutely essential to be well educated about it. It is seen in many cases - people, after getting a credit card, tend to spend more and get themselves in deep financial trouble.

The credit that you use isn't yours - it has to be paid back to the lender. As customers develop bad or uncontrollable spending habits on their credit cards, cases are increasingly coming up at banks where customers enter into a settlement agreement. That is, they negotiate paying an amount lower than what is due on their credit cards as they are unable to pay the entire amount. Customers think they have gotten away cheaply in such cases. On the contrary, entering into such settlements can worsen your situation and give rise to more financial problems in future. It is like adding insult to injury.

When you go in for a settlement, banks can and will legally report you as a defaulter - to the extent of the dues foregone by them - at the credit bureau. All details concerning your default stay at the credit bureau for 7 years. In this period, anytime you apply for a home loan, personal loan or a credit card the details of your default will show up during the verification process and it becomes highly unlikely that any lender will lend you credit.

If you are unable to pay your credit card dues at one go, ensure that you always pay at least the minimum due amount, generally 5 % of your outstanding. In the meantime, find a concrete solution. You have various options - you could apply for a loan against property, stocks, insurance policy or jewelry. Or you could take a personal loan and pay off the credit card outstanding. Just remember that the rate of interest for a personal loan is higher than all the other mentioned options.

Whatever you do, under no circumstances should you seek to make temporary gains and ask the bank to forego their legitimate dues. Remember, although the banks may agree to the compromise to enable them to at least recover whatever they can, such settlements could come back to haunt you in the future, when you need credit - such as when planning to buy a house or a car.