How Resolving Outstanding Debts Can Transform Your Creditworthiness

Feb 84 min read

Updated: Mar 13

Unlock a Better CIBIL Score: How Resolving Outstanding Debts Can Transform Your Creditworthiness

Is debt holding you back? Do you know how resolving outstanding debts improves CIBIL score? If your CIBIL score is low, settling your outstanding debts can significantly improve it. This post explores how tackling your past debts can significantly boost your creditworthiness and pave the way for a brighter financial future.

The Damaging Impact of Outstanding Debts on Your CIBIL Score

Outstanding debts, whether they're unpaid bills, defaulted loans, or credit card balances, have a severe negative impact on your CIBIL score. These debts signal to lenders that you're a high-risk borrower, making it difficult to secure loans, credit cards, or even rental housing. The longer your debts remain unpaid, the more your CIBIL score suffers.

Why Outstanding Debts Hurt Your Credit Score

Negative Payment History: Unpaid debts are reported to CIBIL as negative payment history, which is the most crucial factor in determining your credit score.
Increased Credit Utilisation: High outstanding balances on credit cards increase your credit utilisation ratio, further lowering your score.
Defaulted Accounts: If your debts go unpaid for an extended period, they may be classified as defaulted accounts, which can severely damage your creditworthiness.
Legal Action: In some cases, lenders may take legal action to recover outstanding debts, resulting in judgements or liens that appear on your CIBIL report and further harm your score.

How Resolving Outstanding Debts Improves CIBIL Score

Now, let's delve into how resolving outstanding debts improves CIBIL score:

1. Improved Payment History

When you start making payments towards your outstanding debts, your payment history gradually improves. Consistent on-time payments demonstrate responsible credit management and can significantly boost your CIBIL score over time.

2. Reduced Credit Utilization

Paying down your credit card balances lowers your credit utilisation ratio, which can positively impact your CIBIL score. Aim to keep your credit utilisation below 30% for optimal results.

3. Closure of Defaulted Accounts

Settling defaulted accounts is a major step towards rebuilding your credit. Once you've settled the debt, the account will be updated on your CIBIL report to reflect the new status.

4. Removal of Legal Judgments

If legal action was taken against you due to unpaid debts, settling the debt and getting the judgement removed from your CIBIL report can significantly improve your score.

5. Increased Creditworthiness

Resolving outstanding debts demonstrates to lenders that you're committed to taking responsibility for your financial obligations. This can increase your creditworthiness and improve your chances of getting approved for loans and credit cards in the future.

Strategies for Resolving Outstanding Debts

Create a Budget

Start by creating a budget to track your income and expenses. Identify areas where you can cut back to free up more money for debt repayment.

Prioritize High-Interest Debts

Focus on paying off high-interest debts first, such as credit card balances. This will save you money on interest charges and help you get out of debt faster.

Negotiate with Creditors

Contact your creditors and negotiate a payment plan or settlement offer. Many creditors are willing to work with you to help you resolve your debts.

Consider Debt Consolidation

Debt consolidation involves taking out a new loan to pay off multiple existing debts. This can simplify your payments and potentially lower your interest rate.

Seek Professional Help

If you're struggling to manage your debts on your own, consider seeking help from a credit counsellor or financial advisor.

Conclusion: Take the First Step Towards a Debt-Free Future

Understanding how resolving outstanding debts improves CIBIL score is the first step towards reclaiming your financial health. By taking action to settle your past debts, you can unlock a better CIBIL score, access better financial opportunities, and build a more secure future. Don't let debt hold you back any longer—start your journey towards a debt-free life today!

FAQs About Resolving Outstanding Debts and CIBIL Score

Will settling a debt immediately improve my CIBIL score?
- While settling a debt is a positive step, it may not immediately result in a significant increase in your CIBIL score. It takes time for the updated information to be reflected in your report and for your score to improve.
How long will a settled debt stay on my CIBIL report?
- Settled debts typically remain on your CIBIL report for seven years from the date of the last activity on the account.
Is it better to settle a debt for less than the full amount or to let it go to collections?
- It's always better to settle a debt for less than the full amount than to let it go to collections. Collections can severely damage your credit score.
Will paying off a collection account improve my CIBIL score?
- Yes, paying off a collection account can improve your CIBIL score, although the impact may not be immediate.
What if I can't afford to pay off my debts?
- If you can't afford to pay off your debts, consider seeking help from a credit counsellor or financial advisor. They can help you develop a plan to manage your debts and improve your financial situation.