Dubai: If you don’t have a credit history, it’s next to 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 a few ways you can go about it.
If your goal is to get a credit card, you can start with a secured credit card or co-signed card, or apply to be an authorized user on another person’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 approved easily.
If you want to create credit without a credit card, you can try a credit loan, secured loan, or co-signed loan. While some of these ways are free, others are chargeable.
We discuss two of the above methods in detail below; that is, securing credit cards and loans from credit builders, while understanding the risks they entail and their effectiveness in improving your credit score versus a bad score.
1. Secured credit cards
Applying for a secured credit card requires a certain amount of security deposit against the credit limit given to you on 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 can withdraw the money from your deposit. That 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?
While 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 acts as a guarantee for the banks to cover all purchases if you miss payments.
Making your monthly payments on time is just as crucial with a secured credit card as with a traditional card. However, keep in mind that if you default on your payments, the card issuer may keep your deposit.
Another major risk to keep in mind is that the 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 effective is a secured credit card for building a credit history?
If you don’t have a credit history, a secure credit card can be a first step in starting to create one. If your credit rating is low and it is difficult to qualify for an unsecured credit card or other loan, a secured credit card can help you rebuild your credit.
This is one of the reasons why even though secured credit cards require a deposit and generally have a higher rate than unsecured cards, secured credit cards are still recommended by experts as a great tool for rebuild credit from scratch.
To build your credit history as efficiently as possible, it is highly recommended that you use the card sparingly and only make one or two small purchases per month. Also pay your balance in full each month. When you pay in full, you won’t be charged interest.
Some research indicates that by using a secure 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 transfer 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. Credits to manufacturers
A constructor loan is a loan for which the borrower does not have access to the money until it is fully paid. Fixed payments must 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 total amount, as well as the interest, is repaid. At this point, you will have a good credit rating with regular monthly payments.
When you get a credit builder 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 – typically for about six to 24 months. When the loan is paid off, you get the money in the account.
The advantages of a credit loan are twofold: you build up a little nest egg while creating credit.
How effective is a constructor credit loan for building a credit history?
Since lenders are in control of the funds and therefore take no risk, lenders who offer loans to credit builders are more willing to provide them to borrowers with poor or no credit.
Once you have obtained the loan, the lender reports your payment history to the credit reporting agencies. It helps you build credit because you create a history of on-time loan repayments.
The lenders report the payments on these loans to the 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 reported. And when you don’t have a lot of credit history, just one late payment can be a big setback.
The drop in your scores depends on your starting point and your current credit, but research shows that your credit scores could drop by 60 to 110 points, which is significant when you consider that the scores vary between 300 and 850.
What are the risks of contracting a manufacturer’s loan? Is it worth it?
Experts warn that if you have a history of bad checks, you may not be able to qualify for a credit loan.
Plus, late payments can lead to interest charges that make your loan more expensive than it should be. In addition to interest, late payments also negatively impact your credit score.
Plus, if you have existing debt, a credit builder loan is not your best option. In fact, a global study found that people without 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 always an application process that you will need to go through. While a low credit score is not a barrier, your lender will always review your banking history.
Verdict: Credit Loans Or Secured Credit Cards – Which Is Better?
If you have bad credit, simply relying on cash, prepaid cards, or debit cards to make your purchases will not do anything to your credit score as the activity is not reported to credit bureaus.
When handled properly, the use of a secured credit card to establish or replenish your credit can demonstrate to your credit card issuer and credit reporting agencies that you are a responsible consumer who has used the credit wisely.
Or if it is credit builder loans, one of the most useful features is that you don’t have to have good credit to qualify. Because the loan amount is secured and kept in a savings account, there is no risk to the lender.
In other words, you can 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 don’t really take the money. You are simply establishing a good payment history.
To find out whether you should apply for a home builder credit 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 has recently paid off debt and needs help improving your credit score, which is recommended as a best way to go: credit loans or secured credit cards?
Debt experts suggest that credit loans offer a more secure way to get your finances in order, as opposed to secured credit cards where there is always a risk of default and higher amounts being paid out. as interests.