Credit cards have become an integral part of our lives since their introduction in the 1950s. They provide us the benefit of using credit as per our needs, thereby giving us the freedom to utilize loans to our advantage. Most credit cards offer several other benefits as well. Such benefits include reward points, AirMiles, and discounts on all the transactions done from the card, giving the user an extra edge.
Due to the enticing benefits of credit cards, primarily the instant access to credit, many of us want to procure one. But each of us who gets a credit card also presents with themself a credit risk or the risk of not paying back the amount due to the issuer of the credit card. Due to this, financial institutions thoroughly examine specific criteria before giving out any credit cards.
Essentially, banks or other financial institutions prepare a score based on their evaluative criteria to quantify their credit risk and issue credit cards according to their risk appetite. It is essential to note that the evaluation of whether to issue a credit card or not determines the soundness of the issuer’s financial condition because of the moral hazard involved in issuing one.
Eligibility of credit cards:
Financial institutions decide on some prerequisites while evaluating whether to give you a credit card. The most common criteria looked at include:
1. Age: Unless otherwise stated, credit cards are usually only available to people over eighteen. Add-on or supplementary credit cards are other options available to persons under eighteen.
2. Income: Credit card companies consider this one of the most crucial metrics. Individuals will acquire their preferred credit card as long as they can demonstrate their ability to afford it and pay the applicable obligations.
3. Location: Certain credit cards offer benefits and bonuses only in specific areas, such as Tier-I cities. As a result, a person’s location is important.
4. Credit Score: For banks and financial institutions, having a good credit score is just as important as having a solid income. Individuals who have a strong credit score can simply obtain credit cards of their choosing.
In a nutshell, your credit score determines your credit risk and eventually decides whether you will get a credit card or not. It serves the purpose of collateral for your credit card by proving your creditworthiness.
Several factors determine your credit score. Such factors include:
1. Payment history: Payment history is the most essential factor in credit rating, and even a single missed payment can lower your score. When assessing you for new credit, lenders want to know that you will pay back your debts on schedule.
2. Amounts owed: The next most crucial component in your credit scores is your credit consumption, measured by your credit utilization ratio. The credit utilization ratio is calculated by dividing the total credit you use by the total credit available to you. It gives the issuer a quantified idea of how reliable you are on the credit funds.
3. Credit history length: This comprises the time you have been using credit accounts. This metric is dependent on your age and is directly proportional to your credit score.
4. Credit mix: Credit scoring models look at the different credit accounts you have and how many of each you have to determine how well you handle a variety of credit products. The various accounts can include car loans, credit cards, student loans, etc.
5. New Credit: This metric includes the number of new credit accounts you have recently started and the number of hard inquiries lenders make when you apply for credit. It is inversely related to your credit score.
Not adhering to sound practices in the criteria mentioned above leads to a bad credit score. A person with a bad credit score will most likely face issues in procuring credit cards due to the obvious reasons of reliability of the person and the increased credit risk.
Ways to get credit cards with bad credit scores:
Now, if you have a bad credit score, you may still be able to get a credit card in the following ways:
1. Secured credit cards: A secured credit card functions similarly to a regular one. The only difference is that when you sign up for a secured card, you must deposit collateral, which is usually equal to your credit limit. The collateral can include investments in stocks, gold, etc. This security deposit protects the creditor in the event of a default and allows them to take on riskier debtors. To properly establish and build your credit, use the secured card to make small essential purchases and be sure to pay your payment in full and on time each month.
Check here: Top Secured Credit Cards in India
2. Authorized user: Another way of getting a credit card is by asking someone close to you with a credit card to add you on as an authorized user. You will get your credit card with spending privilege on the primary cardholder’s account. As long as the person pays on time, you should benefit and improve your credit score.
3. High-fee unsecured credit card: If you have exhausted other options and still feel the need to get a credit card, look for issuers that do not require anything and are ready to take on additional risk. To compensate them for the extra credit risk posed by you, you will most likely get a credit card with unfavorable terms, particularly a higher fee, so that they get a satisfactory risk-reward ratio out of you.
To conclude, you should understand that credit scores play a vital role in deciding your access to credit cards and therefore, working on them by making timely payments, utilizing low amounts of credit, building a long credit history, and, having a diversified credit portfolio is the most impactful thing you can do for credit in the future.
On the other hand, if for some reason you want access to credit cards in the present with a bad credit score, there are alternatives including getting a secured credit card, becoming an authorized user or adhering to high-fee cards which should be used with due diligence and to improve your credit score.