How to Get a Personal Loan When You Have a Bad Credit Score

What is a Credit Score and why is it important?

A credit Score, ranging from 300 to 900, is assigned to financially active adults with loans or credit cards. It fluctuates based on your debt and repayment history and helps banks determine your loan eligibility.

A higher credit score indicates lower default risk, increasing your chances of loan approval and allowing you to negotiate better interest rates. It also tracks all active and repaid debts, helping you monitor your credit and correct discrepancies to improve your score.

What Factors Leave A Negative Impact On Your Credit Score?

There are several factors that can negatively influence your credit score. The most important one of them would be defaulting on your loans or missing your monthly instalment. These are factors -

1. Credit Limit Utilisation

Credit limit utilisation is one of the most important factors that can negatively impact your credit score, even when you’re repaying your debt regularly. It refers to the percentage of your credit limit you’re utilising on a monthly basis.

For example, if you have a credit limit of AED 10,000 and you’re regularly using AED 8,000 or 9,000 credit limit per month, it may lead to a negative impact on your credit score. Why?

The etihad credit bureau in the UAE recommends that you have less than a 30% credit utilisation ratio. Failure to do so may show that you’re not a responsible borrower and lead to a drop in your credit score.

2. Number of Active Debt

Your debt-to-income (DTI) ratio plays an active role in determining your credit score. The Central Bank of the UAE requires banks and financial institutions to ensure that your DTI is never above 50% before sanctioning your loan or credit card. So, if your number of active debts puts your DTI close to or above 50%, it can negatively impact your credit score.

For example, if you have a monthly salary of AED 10,000 and you have multiple loans, which puts your total monthly instalments to around AED 5,000 or more (adding monthly credit card debt), it can negatively impact your credit score.

3. Loan or Credit Card Applications

You have to be careful with loan and credit card applications as much as active debt, because too many applications can negatively impact your credit score for two reasons.

• When you apply for a loan or a credit card, the bank or financial institution performs a full credit enquiry. This shows up on your credit report, even if your application has been rejected. When you apply for multiple loans or credit cards in a short span, it can negatively impact your credit score.
• When you apply for multiple loans or credit cards, it shows to credit bureaus that you’re desperate for credit, and that’s flagged as risky behaviour. As a result, multiple applications, even if they are not in a short span, can negatively impact your credit score. Ideally, you should have fewer than three credit inquiries in a six-month span to ensure your credit score is not negatively impacted.

How to Avail a Personal Loan with Low Credit Score?

Even with a bad credit score, it is possible to get a personal loan (PL) safely without relying on risky private lenders. While banks typically do not offer loans specifically for poor credit, there are several secure alternatives. These loans with low credit score -

Secured Loans

These loans require you to pledge an asset such as property, a vehicle, investments, deposits, or gold. The bank lends a percentage of the asset’s value, and once repaid, the asset is returned. In case of default, the bank may repossess the asset.

Salary Advance Loans

Ideal for short-term needs, these small loans (up to around AED 1,500) are repaid with your next paycheck. They are usually interest-free and require no collateral, providing a safe option for minor capital requirements.

Tips to Improve Your Credit Score

There are many ways to improve your credit score, from maintaining a good repayment history to limiting new credit. Some strategies go beyond the basics and can boost your score quickly. Here are the top tips to improve your credit score.

• Check Your Credit Report Regularly: Checking your credit report allows you to track whether your active debt information is accurate or not. If you’ve recently paid off any debt and it hasn’t still reflected on your credit report, it is crucial to monitor your report. The key is to ensure that the repaid debt is reflected as such and is removed from your active debt section. This ensures your credit report is accurate and helps improve your credit score.
• Check Your Personal Information on Your Credit Report: Having minor errors on your credit report can negatively impact your credit score. This includes discrepancies of your reported address on your credit report, your name, and other personal information. These small details must be accurate, and the accuracy pays as it helps improve your credit score, in case these details were inaccurate previously.
• Review Any Shared Borrowings: If you have joint borrowings on your credit report as part of a partnership or a joint bank account, it can negatively impact your credit report. This is especially true if the joint borrowing is not being repaid on time. So, it is crucial that you reconsider these shared borrowings and remove your name from the borrowing to reduce its negative impact on your credit score. You can monitor these borrowings and their repayment history in your detailed credit report.

Conclusion

It is possible to get a loan for bad credit. However, you should strongly consider not opting for a loan in such cases. Additional debt may impact your credit score further. It would also push your DTI ratio closer to or over 50%, which may lead to your applications getting rejected or approved with significantly higher interest rate charges. Ideally, you should consider helping your credit score recover before getting any new personal loan.

Frequently Asked Questions