Personal Finance

LOQBOX – A Novel Solution to Bad Credit Rating

40% of the UK do not have an emergency fund of even £100 and regularly go into their overdraft. This means many people end up defaulting on payments and get a bad credit rating. And getting rid of a bad credit rating can be a nightmare.

But there is now a really interesting solution to this.

LOQBOX helps customers repair their credit rating by letting them save   a set amount (minimum £20) monthly and tracking that they achieve that over 12 months. At the end, you get your money back interest-free. 85% of LOQBOX customers open a credit account within 6 months completing LOQBOX .

But more on LOQBOX later. First, why are we at IslamicFinanceGuru even writing about this stuff?

The Financial Exclusion Scandal at the Heart of Our Community

Financial services play a crucial role in most people’s lives. Much of the population in most societies rely on bank accounts to receive their salaries and to pay their bills. Products such as mortgages, loans, insurance and pensions allow people to build families and save up for a decent retirement.

However, there is still a significant minority of people, with the Muslim community featuring high among them, that are deemed to be financially excluded and cannot build a good credit score.

Consequently, they encounter difficulties in accessing mainstream financial products and services that they need to live a normal social life in the society to which they belong[1].

Several factors can result in financial exclusion including low-income, high-interest rates, unaffordable additional charges, lack of information and support, self-exclusion, disability, accessibility by geography, or cultural barriers.

The Financial Conduct Authority did some research that found that those most likely to be on the brink of being financially excluded include unemployed people, those suffering an illness, those who are not literate, single pensioners, and single parents.

It was also seen to be much more common amongst African-Caribbean, Pakistani and Bangladeshi households[2].

In other words, the Muslim community is losing significant £££ due to financial exclusion.

The Credit Score is the Key to Solving Financial Exclusion

Your credit score is a three-digit number that indicates how reliable you are at borrowing and repaying money[3]. When you have a good credit score, lenders trust you with their money, giving you better borrowing deals and saving you on additional costs you’d pay on loans, mortgages, and access to credit cards.

A bad credit score can stop you getting these products. Credit scores are generated by credit reference agencies (CRAs) who compile information about your financial history known as your credit report.

When you apply to borrow money from a bank, the bank will look at your credit history to see whether you fit the criteria for being eligible to borrow. This is usually to ensure that you will be fully able to pay the loan back in time.

Not all financial products will depend on the credit report system and some lenders will offer their products without undergoing a credit check on the consumer. Suits Me Card[4] is one company that matches that very description.

However, for most consumers the problem still remains and there are still companies that have popped up to solve the problem of financial exclusion such as LOQBOX.

What is LOQBOX?

LOQBOX was founded with the mission to solve the country-wide problem of financial exclusion by helping those excluded from accessing fairly priced credit to quickly ramp up their credit score without losing a ton of money.

LOQBOX is not a bank or lender itself, it is simply acting as an ‘introducer’. Credit is provided by DDC Financial Solutions, so if you take out a ‘LOQBOX’, you’re effectively accepting a finance contract from DDC Financial Solutions.

Your monthly repayments will therefore be based on that contract agreement which will help build your credit score over time, hence opening up credit opportunities to those otherwise financially deprived.

How does LOQBOX work?

It is a remarkably simple yet effective process. LOQBOX grows your credit score by helping you prove your creditworthiness to credit reference agencies – the organisation that compiles and keeps your credit report.

They have simplified the process with three simple steps: save, grow, and unlock:

  1. When you register with LOQBOX, you decide how much you can save comfortably over a year – a minimum being £20 and a maximum of £200 per month[5]. You buy a “digital savings voucher” for what a 12-month payment plan would add up to. So, if you save £100 a month, it would be £1200.LOQBOX then locks away a 0% APR (annual percentage rate) loan for that amount which is provided by DDC Financial Solutions in your LOQBOX account. They tell the credit agencies “guys, we have a credit agreement with this customer for £1200. We’ll let you know how he gets on in keeping up with that.”

    For example, if you were able to comfortably save up £1200, LOQBOX would lock away a loan for that amount over the repayment period of 12 months. The repayments of £100 monthly would be interest-free which is extremely helpful and opens the door to everyone previously left out from financial services.

  1. Once you are successfully repaying the loan in your monthly instalments, the next step is growing your credit score. LOQBOX regularly reports your monthly loan repayments to the three main CRAs (Experian, Equifax, and TransUnion), which shows them that you are capable of handling the repayments of credit through the loan you are repaying, hence improving your creditworthiness.
  2. The last step will unlock the money that you have repaid over the year into a new account and you can walk away with a dramatically improved credit score[6].

Here’s a video summary of how LOQBOX works:

How halal is this?

Muslims and non-Muslims are be able to take advantage of LOQBOX, given that there’s no interest and that you are comfortable opening a new account with one of LOQBOX’s partner banks: Starling Bank, Shepherds Friendly, TSB, RBS, or NatWest.

One must find out whether the accounts that would be created when your credit is unlocked at the end of the LOQBOX repayments term are indeed interest-free. Or, you can just give away any interest earned yourself.

Alternatively, you will be able to retrieve your money back into an existing account for a sum of £30. Is £30 worth it to improve your credit score and get access to a variety of lifechanging loans? I think so and so do many LOQBOX customers who take this option.

A full solution?

LOQBOX seeks to provide a solution to an element of the problem, but it does not help prevent the problem itself. The problem of financial exclusion will not go away just by getting people registered to bank accounts.

The 2017 Global Findex found that when India increased bank account ownership amongst people financially excluded, 48% of accounts were inactive for 12 months. This failure is indicative of the existence of far greater issues that give rise to financial exclusion to begin with.

Due to various historical events and certain economic structures in some societies, many people have perpetually been deprived of financial inclusion.

These involve the following factors: their socio-economic status, low education levels, historical prejudices, limited access to internet networks, unfair market regulations that prioritise profit over social welfare[7].

There’s no easy fix to this for the Muslim community. The answer is a long-term education process and getting involved in investing and spending your money in a more informed way. Easy ways to do that are to subscribe to our mailing list and check out our halal investment comparison page.

LOQBOX Pros

  • No fees. You can open a LOQBOX without any cost and begin building your credit score with ease.
  • LOQBOX can help you access cheaper loan providers.
  • You can unlock your savings at any time and get your money back.
  • Free new account with a LOQBOX partner bank.
  • Opt-out at any time and get your money back.
  • Helps you to save and offers a separate account with a partner bank.
  • Your savings are held in an independently verified, ring-fenced account with Barclays, meaning it’s totally safe.
  • No interest on loan locked by LOQBOX during the plan.
  • 4 stars on Trustpilot[8] and positive testimonials on the LOQBOX website.
  • App launching soon.

LOQBOX Cons

  • You will need to save a minimum of £20 per month. This may still exclude those who cannot do this.
  • Missing a repayment may negatively impact your credit report.
  • If you decide not to open an account with LOQBOX’s partner bank when unlocking your LOQBOX, you will be charged £30 via ‘Flexi-Unlock’[9]. However, this is made clear from the start, so should not deter those who are serious about wanting to improve their credit score.

Conclusion

Overall, I think that LOQBOX is a good idea for attempting to tackle a problem that will no doubt help people grow their credit scores, allowing them to gain access to a variety of financial products.

LOQBOX depends on people’s independence in being able to consistently pay the repayments on time, but not everybody who is financially excluded will be able to do that.

But for the vast majority of people with bad credit histories here in the UK , LOQBOX will open up many doors.

Co-written with Nazaqat Mohammed

Naz is a Muslim, Pakistani-British creative web developer, and digital designer. He graduated from the University of Leicester in 2018 with a Bachelor of Science in Computer Science and has been working in IT consulting since. Lately he has taken a break from his corporate career to focus on his other passions and areas of interest. 

[1] http://www.bris.ac.uk/media-library/sites/geography/migrated/documents/pfrc0807.pdf, What is Financial Exclusion? 01/09/2020.

[2] http://www.pfrc.bris.ac.uk/Reports/In_or_out.pdf, Social and Economic Factors, Incomes and Income Distribution, 2.7, 01/09/2020.

[3] HSBC, what is a credit score? https://www.hsbc.co.uk/credit-cards/what-is-a-credit-score/, 28/08/2020.

[4] https://suitsmecard.com/support/who-are-suitsme, 01/09/2020.

[5] https://www.thisismoney.co.uk/money/saving/article-5607359/Loqbox-claims-improve-credit-rating-saving-month.html How does it work? 01/09/2020.

[6] https://www.loqbox.com/en_gb/faqs/ How LOQBOX Works? 01/09/2020.

[7] https://medium.com/s3idf/defining-financial-exclusion-why-we-need-to-focus-on-the-problem-not-just-the-solution-37117b8f6507, Defining Financial Exclusion: why we need to focus on the problem, not just the solution.

[8] https://uk.trustpilot.com/review/loqbox.co.uk, 01/09/2020.

[9] https://www.loqbox.com/en_gb/ Flexi-Unlock. 01/09/2020.

[10] https://www.moneysavingexpert.com/news/2020/03/credit-score-builder-loqbox-hit-by-data-breach/, Credit Score Builder LOQBOX Hit by Data Breach, 01/09/2020.

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