Are you eligible for a credit card?

Dubai: Credit card application approvals are not a simple task. Banks need to ensure that the credit card holder is reliable enough not to default on payments.

While sophisticated methods of assessment have developed in the world's banking sectors, the UAE is perhaps in its developmental stages of perfecting a reliable credit assessment technique.

Whereas banks in developed economies use credit rating agencies and credit bureaus for their assessments, banks in the UAE have relied on informal methods of checking such as salary transfer letters or internal blacklists.

HSBC, for example, uses blacklists, set criteria for acceptance and the bank's own system of scoring and observance of clients, according to George Lennox, head of Personal Finance Services Credit at the bank.

"Techniques are monitored and altered continuously to ensure that we keep up with the changing market," he said.

The UAE Central Bank runs a risk bureau, to which banks are required to report cases of loan defaults. While that is effective in checking blacklists, says a Dubai-based banking expert, it is not an information and credit history sharing mechanism.

Credit bureaus and credit rating agencies are vital for the banking sector, say banking experts. While a relatively new credit bureau has been established in the UAE, a credit rating agency is not available.

Banking experts say, however, that since credit rating bureaus depend on members to volunteer information, they can only be effective if they have a sizable number of members.

Although the UAE's first credit bureau, Emcredit, has only nine financial institutions as partners, seven of them are among the UAE's top twelve financial institutions, controlling 80 per cent of credit portfolio of the country, according to Bashar Qallab, CEO of Emcredit.

"If you look at any developed economy, credit information occupies a very important role..."

Know how: Definitions

• Credit rating agencies give banks an idea on the likelihood of the potential borrower's capacity to pay back his or her loan by rating their credit history.
• Like credit rating agencies, credit bureaux assess the credit-worthiness of a borrower by getting information from member corporations. Based on a mutual benefit system, members share information in exchange to receiving information. Unlike credit rating agencies, bureaus do not
  score borrowers.
• Credit shield is an insurance system that can have a credit card holder's loan waived in case of death and permanent disability. For a premium, often a percentage of the loan, the card holder can avoid being burdened with the loan, or burdening others, should he or she become disabled
  or die.
• A credit card is a quick and pre-approved loan of a certain amount, known as the credit limit. It is different from a debit card in that its use does not withdraw money from the holder's account immediately but allows him or her to pay it gradually for an interest. A minimum monthly payment is necessary, and is usually determined by the amount spent on the card.

Risky business: What can happen if you cannot pay back?

Let another company take on your payment: Some banks will be willing to pay off your credit card bill if you take a new account and credit card from them. You then have to pay the new company installments instead. This can be the makings of a vicious circle.

Credit rating: In the UAE credit rating doe not exist, but in other countries, this can determine your chances of getting credit cards. All your payments are kept on record, meaning if you have had trouble or are late with payments; the next time you apply for a credit card or a loan, the company will be able to look in to your record to see whether it is worth them taking the risk.

Repossessing: This is again unheard of in the UAE, but in other parts of the world, credit companies are able to take back everything you have purchased with your credit card. If the value of the items does still not cover your debt, then other items can be taken from you as well, to the extent of taking your home.