You need to be aware of how your past transactions are reflected in the credit report
Banks and other lenders depend heavily on credit bureaus to judge the credit worthiness of a loan or a credit card applicant.
Besides following the prudent practices of loan repayments, you also need to read and understand how your past transactions are reflected in your credit report. One key element is the ‘Accounts’ section, which lists details of all the loans and credit cards you have availed so far. There are four different status of accounts under this section; Open, Closed, Settled and Written Off. Let’s understand the significance of these in your credit profile.
Open and closed accounts
As the name suggests, open accounts are live in the system and are hence seen as borrowings which have not yet been repaid in full. On repayment of the loan in full, either through prepayment or at the end of the loan tenure, your bank will accordingly report it to the credit bureaus; hence, you may find the remark ‘Closed’, with details such as the date of closure, in your credit report. It means that you have paid off all your loans in full and the lender has acknowledged the same to the credit bureaus. Live and closed loans have a positive impact on your credit score, as long as you have made all the payments regularly.
Settled, written-off accounts
If you find ‘Settled’ against any account, it means that you have entered into a negotiation with the lender who has subsequently agreed to a settlement. You may have partly paid the dues and settled, suggesting that the lending institution must have accepted a loss in its bid to recover the principal amount or given up the claim of interest/penal charges.
Thus, the status ‘settled’ affects your future credit prospects, which in turn will have a negative impact on your credit score. Often, even with an overall good credit score, lenders view settled accounts negatively, and it can adversely impact your future borrowings.
When a lender completely fails to recover dues from you for a long time, the institution may write them off from its books, and classify them as non-performing assets (NPA). Inspite of your loan getting classified as an NPA, it is your liability to repay the loan taken with interest, in full. Such accounts, till the time they are fully repaid, reflect as ‘Written Off’ in your credit report.
This status has two aspects; Written Off (total) and Written Off (principal). In the case of Written Off (total), you have neither paid interest nor principal, while Written Off (principal) means that you have paid the interest, but not the principal loan amount.
Banking rules specify that when a customer fails to pay the outstanding loan/credit card amount for more than 180 days, the lender has to classify the loan as Written Off and report it to the credit bureaus.
Like Settled, Written Off can dent your chances of a loan or a credit card.
How to deal with them
Normally, these accounts remain in your report almost forever. Among these, the Settled and Written Off accounts can have an adverse impact on your credit history, and it is important to deal with them at the earliest in an appropriate manner to improve your credit score.
Reach out to the lender and ensure that you repay the loan outstanding, along with the interest. Once you pay all your pending dues, you may obtain a ‘No Dues’ certificate. However, even after a settlement, these accounts can remain under Settled Accounts in your credit report.
But, don’t be disheartened by the presence of a Settled or a Written Off account in your report. You can continue to better your credit score by following some disciplinary practices. If you have home loans, credit cards and other accounts outstanding, ensure that you stay on course, paying your instalments on time. Another helpful factor will be the ideal proportion of your outstanding loans to the credit limit; if you can keep this at around 30 per cent, it can enhance your credit score.
By Ashish Singhal, Managing Director, Experian Credit Information Company of India