Is there an old loan or credit card that you have not paid? Do your loan applications get rejected repeatedly, showing a low credit score? Do you frequently get messages or calls reminding you that your loan outstanding needs to be cleared or that your old credit card is still not paid?
If you are experiencing any of the above, chances are you have an old loan or credit card that you have not paid. Old loans and unpaid credit card bills, also known as Bad Debts or NPAs, show up on your payment history even after years have passed, lowering your Credit Score and reducing your chances or getting a new loan or credit card.
What is a Bad debt?
An old loan or a credit card bill that is unpaid for more than a month is called a Bad Debt. When not paid for a long period, such loans are classified as NPA accounts or as Non-Performing Assets. Such cases are then referred to a collection agency who are given the responsibility to follow up on borrowers who have such unpaid debts.
Why is it important to clear old debts?
Interest gets added: When you don’t pay your EMI or credit card bill on time, interest keeps getting added to the amount you have spent. Often the rate of interest applied is very high, as high as 18% p.a. Over time, the outstanding snowballs into a huge amount that is much more than the original amount payable, which becomes difficult to repay.Credit Score gets affected: Your Credit Score is an important tracker of your payment history. It takes into account your past loans, whether you have repaid them, current outstanding and your Social Score. Before issuing a new credit card or a new loan, every lender checks out your Credit Score. Only if you have a healthy Credit Score of 750+, does your loan or credit card application get approved.
Loan Eligibility: Life is full of important events for which we all need money. You may have a requirement for a new loan in the future for a key milestone like a wedding in the family or a home loan. If your Credit Score is low, i.e. if you have an old debt or loan against your name that you have not cleared, it will affect your loan eligibility and you will find it difficult to get the loan approved. Even if it does get approved, it will be at a high rate of interest.
How to clear old Loans?
Step 1: List out all your overdue debts: You may be surprised to find some loans that you had forgotten about in that list. Those old loans impact your Credit Report negatively.Step 2: Check your Credit Report: Ask for your Credit Report. This will give you a list of all the loans outstanding in your name. A good Credit advisory service is the right place to get a Credit Report, which can be free of cost.
Step 3: Debt negotiation: A good credit advisory agency can negotiate on your behalf with your bank or lending institution. This helps in reducing late payment charges or interest rate of your loan or can work out a reasonable amount that you can pay comfortably. You can opt for full payment, if you have the funds or you can opt for Debt Settlement, which normally is equal to half of what you owe.
Step 4: Debt Settlement: You should be aware that Debt Settlement shows up on your credit report as a settlement and affects your Credit Score. Ensure that you take the settlement in writing from your lending institution so that they do not go back on their word.
Step 5: Settle multiple loans: If you have multiple loans against your name, you should settle each one of them, one at a time. This will help you improve your Credit Score.
Step 6: Budget your finances: Once you have paid off your old loans, make budgeting a regular feature of your life. Avoid unnecessary expenditure on your credit card, repay EMIs on time and keep an emergency fund for any unforeseen expenses in the future.
Although this seems like hard work, clearing off old debts is worth it in the long run. It can be done with a good Debt Counselling service like Credit Monitor. Your Credit Score will improve and you no longer need to worry about due payments and mounting interest.
Clearing past debts puts you in control of your own finances. Take the 1st step today and make build a debt-free life.
