Credit card default: How bank settlements affect your CIBIL score and future loans

Missing credit card payments for an extended period can eventually lead to a default, after which banks may offer a one-time settlement option to recover part of the outstanding dues. While such settlements may provide temporary financial relief to borrowers struggling with repayments, they can leave a long-lasting impact on a person's credit profile and future borrowing ability.

A default notice is usually sent by the credit card issuer after 6 consecutive missed payments, according to a report by Paisabazaar. If you keep missing payment of credit card bills on time, you may be charged with hefty interest charges and end you up becoming a defaulter.

Once your are marked as defaulter, the bank may categorise the account as a non-performing asset (NPA) after a certain period of time and offer a one-time settlement option to recover some of the money. Here's how this could impact a person's future loans and CIBIL score.

What happens after you default on a payment?

If you fail to pay the minimum amount due even after the due date, the account first becomes overdue. A short delay of a few days is typically recorded internally as early delinquency (for example, 5 days past due). If the payment is still not made by the next billing cycle, the amount will move into a a higher delinquency bucket, such as 30 days past due.

As the delay continues, the bank intensifies its recovery efforts through frequent phone calls, SMS reminders and emails. If the dues remain unpaid for more than 90 days, the account will be classified as a NPA as per the Reserve Bank of India (RBI) norms. At this particular stage, the concerned lenders may escalate recovery actions, which would involve authorised recovery agents, or issue legal notices, depending on the case.

If the default continues beyond 190 days, that is, over 6 months, your credit card account will be put under the recovery pool. This is the final resolution the issuer can take. Under this scenario, the issuer will declare your account as a NPA, meaning the issuer views your credit card account as a loss. At this point, the issuer may also file a lawsuit against the defaulter or sell their debt to a debt collection agency, according to Paisabazaar.

What happens after settlement?

If you manage to settle your credit card dues under the prescribed process, here’s what happens next:

• Your credit score will drop: Credit card issuers regularly report account details to credit bureaus such as CIBIL & Experian. As a result, any instance of default or one-time settlement is recorded in your credit history. Both settlements and defaults can significantly impact your credit score and may remain on your credit report for up to 7 years, depending on bureau policies and reporting norms.

• Issues in getting loans in future: A settlement and default signals to future that you were previously unable to fully repay your credit obligation. As a result, banks or credit card companies may view you as a higher-risk borrower. This can lead to loan or credit card rejections, or even approvals with stricter conditions such as higher interest rates, lower credit limits, or additional scrutiny during underwriting.
• Late fee and credit card interest will be applicable: If you fail to pay the minimum amount due by the deadline, late payment charges and credit card interest will be applicable. Additionally, in certain cases, issuers also increase the applicable rate of interest on the credit card in case of missed payments. This can ultimately lead to a sharp increase in the outstanding amount, causing the debt to accumulate rapidly over time.