Rahul is an IT employee with a promising career. He is credit-savvy, uses his credit card regularly, and has paid off a two-wheeler loan and a consumer durable loan. He even takes personal loans to purchase the latest smartphone or go on an expensive holiday with his friends. Now, he desires to buy a dream home before starting a family. Having taken several loans and repaid them on time, he is confident that he would be able to get a home loan at the best interest rates.
He approaches his banker and applies for a home loan. To his surprise, he was informed that his loan application was rejected. He was told that the "settled" status on his credit report was the reason for his loan not getting approved. Rahul was confused as he believed that the status "settled" means a loan account is closed. However, only after a conversation with the lender, he finally understood that the status "settled" is not a positive remark, even though it sounds positive.
If you want to build a healthy credit report and boost your credit score, the first step is to understand the different terms used in your credit report. The "status" on your credit report is an indicator of the health of your account. Being aware of the common statuses like "closed," "settled," "written off," will give you a clear picture of the health of your credit report. So that you can take the right measures to remove negative remarks on your credit report.
In this article, we explain the common negative status flags that can occur on your credit report and what they mean.
This means the lender agrees to a lesser payment amount than the total amount the borrower owes to the bank. Banks agree to a settlement amount because they hope to recover at least a partial amount from the borrower. Most lenders agree to at least recover the principal cost of the loan.
This is what happened in the case of Rahul. He had taken a personal loan to go on an overseas vacation. Initially, he was on track with the repayments and paid all the monthly EMIs on time. However, during the last six months of the repayment period, his father had a medical emergency, and Rahul couldn't pay the EMIs on time. So, he had worked with the bank and agreed to pay a settlement amount.
However, since the settlement amount was lesser than the total amount Rahul owed to the bank, his bank had reported the loan status as “settled” instead of “closed.” This was the reason why his home loan application had been rejected.
Another negative status to watch out for is "written off." When a borrower does not make any payments on the outstanding credit card bill or loan amount for more than 180 days, the lender reports it as a "write off."
The written-off status is further divided into two categories:
Written Off (Total) – In this case, the total outstanding amount is written off. This includes both principal borrowed and the interest.
Written Off (Principal) – In this case, the outstanding principal amount is written off.
Both these statuses harm your credit health. If an individual has the written-off status on his/her credit report, then it's incredibly challenging to avail future loans or a credit card.
How to get negative remarks off my credit report?
Negative remarks on your credit report are not only an indicator of your past mistakes, but they also hamper your future prospects. Negative remarks on your report also impact your credit score negatively. Additionally, they also prevent you from securing loans in the future. Even if you're sanctioned a loan, the interest rates won't be in your favour.
Any negative remark on your credit report like settled or write-off, remains on your report for a long time. So, you need to take corrective action to remove it.
So, what’s the solution?
The best option is to pay off the outstanding debt. Connect with your lender and pay the remaining owed amount in full. Once you have paid off all your dues, the lender will report this to the credit bureaus, and the remark status will be changed from "settled" or "write-off" to "closed."
Even if you're unable to settle the outstanding amount in full, work with your lender to arrive at a settlement amount. As mentioned above, a settlement amount is lower than the total amount you owe to the creditor. When you pay the agreed amount, the lender notifies it to the credit bureau, and the remark on your report will be changed from "write-off" to "settled." Though "settled" is still a negative remark, it's marginally better than having a written-off status on your credit report.
The Bottom Line: Watch out for Negative Remarks on your Credit Report
It's important to understand that though the "settled" remark doesn't impact your credit score directly, it still shows up on your credit report. Besides this status, the days-past-due will also be mentioned on your report, since you have not made timely payments. Different banks have varying policies when it comes to lending loans to borrowers with "settled" status on their credit reports. Some lenders may approve your loan but charge you a high-interest rate, while others may outright reject your loan application.
Your past credit behaviour has a long-term impact on your credit history and scores. On-time payments and responsible usage of credit impact you positively. On the other hand, delayed payments, missed EMIs, loan defaults – impact your credit score and report negatively.
Your future access to credits and the cost of future loans depend a lot on the health of your credit report. Hence, you need to be wary of negative remarks on your credit report and take proactive action to remove these statuses as quickly as possible.