The Double-Edged Sword: How Settling and Closing Accounts Impacts Your CIBIL Score
Navanita Dash
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Many believe that settling debts or closing unused credit accounts is always beneficial for their credit score. However, the reality is more nuanced.
Let's explore how these actions can affect your CIBIL score and what you need to consider before making these financial moves.
1. Settling Accounts:
- Definition: Paying less than the full amount owed, usually in a lump sum.
- Positive Impact: Removes the burden of debt, and stops collection calls.
- Negative Impact: This may be reported as "settled" rather than "paid in full", potentially lowering your score.
- CIBIL Score Effect: This can cause a temporary dip but may improve the score long-term as the overall debt decreases.
2. Closing Credit Card Accounts:
- Positive Impact: Can help control spending, and reduce the risk of identity theft.
- Negative Impact: Reduces available credit, potentially increasing credit utilization ratio.
- CIBIL Score Effect: May lower score, especially if it's a long-standing account or one with a high credit limit.
3. Closing Loan Accounts:
- Positive Impact: Sense of accomplishment, one less bill to manage.
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- Negative Impact: Reduces credit mix, which accounts for 10% of CIBIL score.
- CIBIL Score Effect: Minimal immediate impact, but can affect the length of credit history over time.
4. Strategies to Minimize Negative Impact:
- For settlements: Try to negotiate "paid in full" status if possible.
- For credit cards: Keep oldest accounts open, close newer ones if necessary.
- For loans: Consider keeping a small balance to maintain the credit mix.
5. When It Might Be Worth the Hit:
- High-interest debts causing financial strain.
- Annual fees on unused credit cards.
- Simplifying financial life outweighs short-term score impact.
Conclusion:
While settling debts and closing accounts can sometimes negatively impact your CIBIL score, they may still be the right financial move in certain situations. Always consider your overall financial health and long-term goals when making these decisions.
If in doubt, consult with a financial advisor or credit counsellor (me for example).