If you are unable to meet your monthly EMI payments, depending on the number of days that have passed without payment, you will be branded a defaulter by the lender.
From the novels we read, the movies we see, to the relations we keep, everybody loves a pleasant ending. It is the same when it comes to ending our credit accounts, more so because incorrect closure could lead to unpleasant consequences, and could dash our hopes of obtaining new credit in the future.
Read on to find out the correct way to close different credit facilities, and how failing to do so could affect your creditworthiness.
Closing credit card accounts
As a rule never close a credit card. There are situations such as you have too many credit cards or you are unable to at least make minimum due payments on your existing credit cards, in which you may consider closing one.
If you must close credit cards, close the one that you obtained most recently and keep the older credit cards open since the older ones will help build your credit score, especially if you have been making on-time repayments consistently.
Also, close credit cards that you do not use, but keep at least one open for you to use as required. For credit cards, that you keep open, ensure that you do not utilise the available credit line to the fullest — keep credit line utilisation under 50%. This way you will not be considered credit hungry and this will help build your credit score.
The first step would be to assess the number of credit cards that you have and the status reported against each. This can be done by obtaining your credit report which is maintained by credit bureaus like CIBIL and Equifax. One glance at your credit report would give you a sense of your credit health.
The below-mentioned statuses could be found against your credit card accounts.
CLOSED - A credit card is considered ‘closed’ when you have made regular payments and there are no outstanding amounts against your name. A closed account reflects with a blank status in the credit bureau report and you must ensure that this is appropriately reflected on your report.
SETTLED - A ‘settled’ status against your credit card account means that you have not paid the total outstanding to your credit card issuer and that the issuer and you have mutually agreed to ‘settle’ for an amount lesser than the total outstanding. This is considered a ‘negative’ status and could impact your ability to obtain new credit in the future. Most banks may be unwilling to approve new loans and credit cards to anyone who has a ‘settled’ account from the past. It is best to ensure that upon closure of a credit card, the status is reported as ‘closed’ in order to be considered loan eligible in the future.
WRITTEN-OFF - This appears on your credit report when you have missed multiple months of credit card payments. Accumulation of these defaults in payments would result in your account being reported as ‘written off”. This will definitely negatively impact your credit score and future loan eligibility.
Both ‘settled’ and ‘written off’ status against your credit card accounts could potentially affect your creditworthiness and you must act to get these accounts ‘closed’. In addition, one might see statuses listed as ‘suit filed’, ‘Post write-off settled’, DPD, etc. that are also considered as negative by lenders in the future, and requires to be rectified prior to applying for new loans.
Closing loan accounts
Personal loans and loans that have a monthly installment (EMI) have a monthly repayment schedule and a contractual tenor. As long as these are repaid as originally contracted, the loan will self-liquidate at the end of the contractual tenor and you should have no problem in the way the loan is closed and reported to the credit bureau.
However, if you are unable to meet your monthly EMI payments, depending on the number of days that have passed without payment, you will be branded a defaulter by the lender. Successive instances of non-payment of monthly instalments would result in your loan account be classified as ‘written off’.
Under some conditions when you are genuinely unable to meet payment deadlines, lenders will offer an option of a one-time settlement where you will be required to pay an amount which is lesser than the total outstanding amount.
A settlement might provide you temporary respite but will put you in a sticky situation when you apply for loans in the future as banks would be unwilling to lend because of your patchy credit history.
The only way out from this situation is to properly close the loan account for which you must first obtain your credit report and check if you have any loan accounts in the “settled” or “written off” state.
Get in touch with the lender to pay the outstanding dues to close your loan account in the right manner, and obtain a ‘no dues’ certificate from the lender which is legal proof that you have closed your loan account without any outstanding dues.
Your decisions have consequences, and sometimes these are far reaching; closing an old account without any outstanding is the only way to ensure that these accounts do not affect your future borrowing capacity.(The writer is Co-Founder & CEO of Creditmantri.)