Settling outstanding credit card debt by accepting the settlement offer made by the company to customers who can’t pay their bill is actually a very disadvantageous proposition for the customer, according to fintech firm Qbera.
While the best option for the customer is to pay the dues every month in full, since this leads to several benefits such as a high credit score, a likely increase in the credit limit in the future, and a possible waiver of the annual charges, this may not always be possible.
“Where issues arise is when one is not able to pay one's credit card debt in full at the end of the month,” Aditya Kumar, Founder and CEO of Qbera said in an interview. “In that case, typically, your only real option is to pay the minimum due amount at the end of the month, which is usually 5% of the total outstanding amount. However, interest is billed to you on that at approximately 42% per annum, so that is an incredibly expensive option.
“Your third option is to not pay the bill at all, which will result in a significant drop in your credit score and penalty charges being levied on you, and continuous follow-ups from the credit card company to get you to at least clear the minimum due.” In cases where the customer has been paying the minimum due for several months, or has stopped all payments for a long time, the credit card institution proactively offers the customer a one-time settlement.
‘Tempting offers’
“Let's say you have ₹50,000 outstanding, they will say you pay ₹25,000 and they will waive the remaining ₹25,000 and close your card,” Mr. Kumar explained. What is not disclosed to the customer at the time, he said, is “settling any debt does appear on your CIBIL report and has a detrimental impact on your score.”
Mr. Kumar explained that the credit card limit for salaried employees or low-middle income customers is quite low, and so an offer to waive even ₹10,000-15,000 of their credit card debt is extremely attractive. As many as 40% of customers offered a settlement take that option, he said.
“But the thing is the same customer may want to someday take a car loan, or a housing loan,” he said. So, while the offer to settle the debt seems tempting at the time, “It has such a negative impact on your score that you are not able to avail credit any time in the near future.” A better option, he said, was to avail a personal loan or a secured loan such as a gold loan, repay the credit card debt and then repay that loan in easy EMIs over as long a period as 60 months.
“These loans are very common from both banks and NBFCs,” Mr. Kumar said. “For us, almost 15% of our customers today are coming for loans to repay their credit card dues.”
