Credit cards share some common features regardless of the issuer or location. One such feature is the ability to make purchases on credit. However, specific features can vary based on various factors.
For example, they may be obtained without undergoing a credit check in certain parts of the world like Canada and the United States. However, the same cannot be said about Norway and some other places. In Norway especially, this is a result of fiscal policies that forbid offering loans to people who have not been credit-checked.
This was not always the case as it was possible to secure loans without these checks at some point. However, the predatory habits of lenders and a few other reasons necessitated the Credit Information Act in the year 2019. It has since become a mandatory procedure for lenders since then. You can read this article for more information on this.
These checks impact loans in certain ways. This is both for lenders and borrowers. For example, they can contribute to the delay in loan approval processes. If you’re curious about why they are mandatory in Norway and whether they are worthwhile, then keep reading as answers will be proffered here in this article.
Reasons for Credit Checks by Credit Card Companies
There are valid reasons for these checks by credit card companies. Some of these reasons are listed and explained below:
There are secured, as well as unsecured credit cards. The former requires that the cardholder deposits a certain amount of money before being granted the card. This is a form of security for the issuer as the spending limit and other privileges are tied to the deposit made by the cardholder.
Well, there are not many such options in Norway as most of the available options are unsecured. This means that issuers take a significantly higher risk by offering them to applicants. As a result, these issuers need to be very certain that approved applicants can make payments and fulfill other loan obligations.
These checks are necessary for this reason. Norway has a very organized and centralized system that makes it easier to obtain information about this. This is because of its information register on credit matters. Fortunately, the ability to make these inquiries and get results on time makes things a lot better.
Issuers take a financial risk when they approve the application of any applicant. This is regardless of how creditworthy the applicant is. However, offering loans to less creditworthy individuals is more of a risk than when they are offered to very creditworthy individuals.
If applications are approved, prospective cardholders will not all be offered the same terms and conditions. Some will get more cardholder-friendly terms and conditions than others.
Approved applicants who are found to be more creditworthy after checks have been carried out will likely be offered better terms and conditions. On the other hand, terms and conditions for those who are less creditworthy would be harsher. This is all about effective risk management.
To Determine Interest Rates for Cardholders
Interest rates are not all to be known about drafted terms and conditions by issuers. However, they are a huge part of it and should be well understood for this reason. The interest rate that applies is a huge part of the actual cost of being a cardholder.
As explained early on, cardholders do not all get the same terms and conditions and this applies here as well. Less creditworthy applicants are more likely to get high-interest rates if their application is approved. More often than not, it is the other way around for more creditworthy applicants.
For this reason, it is wise to improve your credit score and other aspects of your financial profile before applying for credit cards. This is given how a good score greatly increases your chances of getting improved terms and conditions from issuers.
By the way, applicants can have a good idea of the average interest rates set by issuers. Consulting online comparison websites makes this possible. You can visit https://www.kredittkortinfo.no/kredittkort-på-dagen/ for more information about this.
To Set Spending Limit
Speaking of effective financial risk management by lenders, it is unwise to loan huge amounts to individuals that are not very creditworthy. This is exactly how the average issuer thinks and influences how they set purchase limits for their cardholders.
This simply means the maximum amount that cardholders can borrow using their card for purchases and even cash advances. The limit can be determined by the cardholder as some cardholders request that the limit is not beyond a predetermined amount.
This could be for proper financial management as some individuals believe that being exposed to huge amounts is too tempting for them. But more often than not, the limit is set by the issuer and the creditworthiness of the applicant mainly determines how high or low it will be.
Besides the applicant’s creditworthiness being a major determinant, some issuers have caps. This means that they will not offer beyond an agreed amount to any of their prospective, new, and existing cardholders.
This is a matter of internal policy. Some issuers do this to make their financial services available to more clients as against a few very creditworthy clients who need very high spending limits.
On the whole, the chances of having a high spending limit are high if you are very creditworthy. It is the other way around for those who are not so creditworthy.
Obtaining credit cards through fraudulent means is less likely in several parts of the world. Norway is a prime example and this is thanks to its well-organized credit information register. This well-structured and extensive register is consulted for inquiries.
As a result, it can reveal various kinds of inconsistencies. For example, it is likely to indicate if the applicant’s presented information is fabricated or even stolen.
Credit checks are mandatory before loans of any kind and type can be granted to applicants in several parts of the world. Norway is a prime example and this is for the sake of regulatory compliance, among other reasons.
The failure of lenders to carry out credit checks on applicants is an outright violation of the Credit Information Act. There are penalties for violating this Act. The penalties range from fines to even imprisonment.
By and large, the severity of the violation is what determines the actual penalty. The NDPA (Norwegian Data Protection Authority) is the regulatory authority charged with the responsibility of ensuring that the details of this Act are not violated by any party (lender or borrower).
To Protect Borrowers
The blatant predatory lending habits of lenders were a major reason for the Credit Information Act as overseen by the Norwegian Data Protection Authority. Many lenders took undue advantage of borrowers by imposing ridiculously high-interest rates and harsh loan terms. This was because they sometimes failed to run credit checks; which would enable them to truly ascertain how creditworthy applicants were.
This was also the case in other Scandinavian countries besides Norway. As a result, government administrators with a keen interest in the financial sector put the proper measures in place. The Credit Information Act is a testament to this.
Other Reasons for Credit Checks
Credit card issuers and lenders at large are not the only parties that run credit checks. There are other parties (none-finance related institutions) that may make this kind of inquiry. Some of them include the following:
Landlords & Property Management Businesses
Some landlords and property management businesses are quite keen on properly screening prospective tenants before renting out their space. This is quite understandable as they only want the right tenants.
Credit check requests may be sent by landlords and property management businesses for this reason. This is to be certain that prospective tenants can fulfill their financial obligations as tenants.
Some employers strongly believe that the financial state of their applicants determines how well they can handle certain positions. These are especially employers hoping to hire for finance-related positions and very sensitive positions. As a result, such employers can request this information about their applicants from the pertinent authority.
Utility Service Providers
Ideally, utility service providers get paid by subscribers after offering their services. This is except it is a prepaid service. Unfortunately, some of these service providers do not get paid after offering their services.
In the bid to avoid this, these utility service providers may request this information. The gathered information may determine if some form of deposit will be required before offering their services.
Some government institutions may request this information about certain people. For example, people requesting some sort of security clearance may be cross-checked in this way.
Another example is people applying for key government positions. This is to be certain that they are trustworthy, judging from their financial state.
Just like financial institutions, effective risk management is very important for insurance institutions. As a result, people with poor credit status may be considered high-risk by an insurance service provider. This can determine the premiums to be paid by insured parties, among other things.
There is no such thing as getting a credit card without credit checks in Norway. This has been the case since the Credit Information Act came into effect in 2019. This Act means that the chances of getting a credit card (or any other loan) and the terms and conditions that apply are mostly tied to your credit state. As a result, loan applicants need to work on improving their credit scores.