Dubai: If you don’t have a credit history, it’s nearly impossible to get a loan, credit card, or even a house. But let’s say you have bad credit, what do you do then?
To build your credit score from scratch, you need to prove that you can repay your dues responsibly, but for that you need to get credit or a loan first. Here are some ways to do it.
If your goal is to get a credit card, you can start with a secured credit card or co-signed card, or request to be an authorized user on someone else’s card or an “additional cardholder”, as some banks call it.
You can also get a retail store credit card that offers low credit limits but can be easily approved.
If you want to build credit without a credit card, you can try a credit-building loan, secured loan, or co-signed loan. While some of these ways are free, others are paid.
We discuss two of the above methods in detail below; namely, securing credit cards and credit loans, while understanding the risks they carry and their effectiveness in improving your credit score compared to a bad one.
1. Secure credit cards
Applying for a secured credit card requires a certain amount of security deposit against the credit limit given to you upon approval. This amount is refunded or adjusted later.
Secured credit cards work much like traditional credit cards. The main difference is that with a secured card, you pay a cash deposit up front to secure your line of credit.
The deposit is usually equal to your credit limit, so if you deposit 350 Dh, you will have a limit of 350 Dh. The deposit reduces the risk for the credit card issuer.
If you don’t pay your bill, the issuer may take money from your deposit. This is why these cards are available for people with bad credit or no credit.
What are the risks of having a secured credit card? Is it worth it?
Although credit history can be used to determine eligibility for a secured card, the line of credit it offers requires a security deposit. This security deposit serves as a guarantee for the banks to cover any purchase, if you miss payments.
Making your monthly payments on time is just as crucial with a secure credit card as it is with a traditional card. However, keep in mind that if you are in default, the card issuer may retain your deposit.
Another major risk to keep in mind is that interest rates on secured cards are generally higher than those on unsecured cards.
So if you have a secured credit card, keep an eye on your credit score over time; when it has improved significantly, ask your issuer to switch to an unsecured card.
How is a secured credit card effective in establishing a credit history?
If you don’t have a credit history, a secured credit card can be a first step to start building one. If you have a low credit score that makes it difficult to get an unsecured credit card or other loan, a secured credit card can help rebuild your credit.
This is one of the reasons why even though secured credit cards require a deposit and have a generally higher rate than those of unsecured cards, secured credit cards are still recommended by experts as a great tool. to rebuild credit from scratch.
To build your credit history as efficiently as possible, it is widely advised to use the card sparingly and to make only one or two small purchases per month. Also pay your balance in full each month. When you pay in full, you will not be charged interest.
Some research indicates that by using a secured card carefully, it only takes about a year to improve their credit score enough to qualify for an unsecured card.
Some issuers will allow you to switch your secured line of credit to an unsecured line of credit, which is better for your credit score because it doesn’t require you to open a new account.
2. Credit builder loans
A credit builder loan is a loan where the borrower does not have access to the money until it is fully repaid. Fixed payments are to be made each month on the total loan amount.
You will finally receive the fund amount by accessing a savings account containing the loan amount once the full amount, plus interest, has been repaid. At that time, you will have a good credit score thanks to regular monthly payments.
When you get a credit loan, the money you agree to borrow is deposited into a bank account held by the lender.
You will then make monthly principal and interest payments – which are reported to the credit bureaus – for a term generally of around six to 24 months. When the loan is repaid, you get the money from the account.
The benefits of a credit enhancement loan are twofold: you build a small nest egg while developing your credit.
How is a credit builder loan effective in building credit history?
Since the lenders control the funds and therefore risk nothing, lenders who offer credit building loans are more willing to extend them to borrowers with poor or no credit.
After you get the loan, the lender reports your payment history to credit reporting agencies. This helps you establish credit because you create a history of on-time loan repayments.
Lenders report payments on these loans to credit bureaus. If you make your payments on time, it creates a positive payment history, which, for example, accounts for 35% of your credit scores.
However, if you make a late payment, this will also be flagged. And when you don’t have a great credit history, just one late payment can be a big setback.
How much your scores drop depends on where you start and your current credit – but research shows your credit scores could drop by 60 to 110 points, which is significant considering that scores range between 300 and 850.
What are the risks of taking out a builder’s loan? Is it worth it?
Experts warn that if you have a history of bad checks, you may not qualify for a credit builder loan.
Plus, late payments can result in interest charges that make your loan more expensive than it should be. In addition to interest, late payments also have a negative impact on your credit score.
Also, if you have existing debt, a credit builder loan is not your best option. In fact, a global study found that people with no debt experienced an increase in their credit rating, and those with existing debt experienced a three-point decrease in their credit rating.
You should also be aware that there is still an application process that you will need to go through. Although a low credit score is not an obstacle, your lender will still review your bank history
Verdict: Credit builder loans or secured credit cards – which is better?
If you have bad credit, simply relying on cash, prepaid cards, or debit cards to make purchases won’t do anything to your credit score because the activity isn’t reported to the bureaus. credit.
When handled properly, using a secured credit card to establish or rebuild your credit can demonstrate to your credit card issuer and credit reporting agencies that you are a responsible consumer who has used credit wisely.
Or if it’s credit builder loans, one of the most useful features is that you don’t need to have good credit to qualify. Because the loan amount is secured and kept in a savings account, there is no risk for the lender.
In other words, you may qualify for a credit builder loan if you have the money to put into a savings account as per your lender’s requirements. You won’t be turned down because you’re not really taking any money. You are simply establishing a good payment history.
To find out if you should apply for a credit builder loan or a secured credit card, here’s what the experts recommend.
Let’s say you’re someone who hasn’t started building credit or recently paid off debt and needs help improving your credit score, which is recommended as a better way to get better. take it – credit loans or secured credit cards?
Debt experts suggest that credit builder loans offer a safer way to get your finances in order, as opposed to secured credit cards where there is always a risk of default and paying amounts higher as interest payments.