Martina Schmidt, Ph.D.

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When do you think it makes sense to seek out a credit card with no credit check for new applicants?

As long as credit cards are used responsibly, they can offer so many different benefits, such as convenience, rewards, fraud protection, establishment of credit history, access to temporary loans, and the ability to make purchases in foreign currencies while traveling. These are all important advantages that someone with a limited-to-no credit or damaged credit may want to enjoy. If an applicant with poor credit is not able to qualify for a regular credit card, then checking into a card that does not require a credit check makes sense as the approval odds improve. Since the application does not involve a hard inquiry on the applicant’s credit report it also prevents credit-score damage. However, the challenge is to find a card that still offers a reasonable interest rate and low fees, a low or no deposit requirement, and at least some rewards.

If you get a no-credit-check card, my advice is to use it very responsibly and take the necessary steps to build up your credit. As these cards typically have a deposit requirement, lower credit limits and higher interest rates and fees in order to compensate the lender for taking on additional lending risk, it is particularly important to be aware of the card’s terms and act accordingly. For example, if the card carries a high interest rate, then paying off the balance in full and on time each month is imperative. Once you establish better credit, then switching to a regular card probably makes sense.

Should consumers be suspicious of credit cards that don’t check applicants’ credit history?

I would definitely advise to use caution when applying for a credit card that does not check the applicant’s credit history. Predatory lenders can take advantage of uninformed borrowers with low credit scores and/or no credit history by charging excessive fees and interest rates and requiring high deposits. However, there is some good news for those who do not want to have their credit score checked. Some newer, alternative lenders in the credit card space nowadays have their own underwriting software and criteria that can evaluate credit risk by looking at other factors besides a credit score, such as bank accounts, income and employment. In return for not pulling a credit report, an alternative credit card issuer may require the applicant to set up an in-house spending account that has to receive certain minimum deposits. With the advances in artificial intelligence (AI) and FinTech, my guess is that this type of underwriting process will likely become more common in the future.

Before choosing a credit card, it is crucial to do your homework to avoid being exploited. Research and compare the benefits, required deposits, fees and interest rates across different card offerings. If you come across a card that does not require a credit check but charges excessively high fees, it may be best to continue your search. Another option to consider is a credit card that allows for cosigners or a secured credit card, which can help to build your credit.

Is it possible to put a value on a credit card feature such as no credit check?

There are two types of value that credit card features offer: monetary and emotional value. Putting a specific number on either one of these values with regards to a credit card feature like no credit check is challenging as it depends on many different factors. These can include the card’s terms and benefits, future economic factors, and the applicant’s financial situation, beliefs, and value system.

When it comes to credit card features in general, I would say that some are easier to value than others.  For example, convenience offers more of an emotional value. It is very hard to value because it is subjective and depends on the individual’s circumstances.  Features like rewards or cashback offer mostly monetary value and are easier to value. But even determining their value can be challenging because it is difficult to predict the amounts that will be spent and the type of purchases that will be made in the future.

Let’s look at some examples:

If someone gets 2% cashback and purchases a necessity that costs $100, then the current monetary value of this feature, $2, can be easily calculated. However, trying to figure out what the value of this feature will be for the next few years is much more difficult.

Let’s assume that someone who currently does not have a credit card wants to rent a car in order to travel to an important family gathering. This person has no credit history and wants to get a credit card to pay for the car rental. Let’s also assume that due to mistiming of cash in- and out-flows, using a debit card or a secured credit card are not an option. In this case, a card with no credit check, which essentially provides access to a temporary loan, may have a very high emotional value. But how much this feature is worth is hard to say as this is based on the emotional benefit this person gets from being at the family gathering.

In another example, let’s assume someone needs to make an emergency medical payment but does not have the cash on hand or the credit score to qualify for a traditional credit card. In this case, a credit card with no credit check may also have a high emotional value because it allows the person to make the needed medical purchase and perhaps reduce physical pain. Again, putting an exact value on this feature is very difficult.

The bottom line is, when it comes to credit cards, evaluate your options and select the card that you believe will offer you the highest monetary and emotional value and aligns best with your needs and financial goals. If you are looking to improve your credit score, I suggest using a credit counseling service or a credit-building app.