credit traps and how to avoid them

If you have ever made a decision involving money during a period of financial stress, chances are it might have been one you regretted later. If your attempt to ease your financial issues dug you in even deeper into a credit trap, you will likely find yourself facing even greater pressure. If you are getting in deeper into a credit trap, a debt-consolidation personal loan can be an ideal solution.

Credit traps can wreak havoc with more than just your household budget. Families struggling with financial problems often find the stress caused by financial issues can impact personal and family relationships, job performance and even health. If you are dealing with financial issues and looking for a way out, the following information will help avoid common credit traps and put you on the path to a healthier financial future. 

Payday loans

Sometimes called cash advances or a loan with deferred-deposit, the payday loan is one of the worst of the credit trap offenders due to the extremely high interest rates charged. They are designed to tap into a consumer’s desperation and most are structured to give the lender access to your checking account either electronically or by check. Since the payment is likely to take a large chunk from the next scheduled payday – hence the name – it becomes very difficult for the borrower to regain their financial footing and pay the loan off quickly. Instead, many borrowers end up extending the original loan and end up paying additional fees, which only continues the pain.

To avoid falling into the payday loan credit trap, look for other ways to obtain the money you need. Some of these ways include:

  • Search for funds through local churches, nonprofits or community groups that offer assistance in the form of grants or small short-term loans 
  • If you need money for a car repair or dental, attorney or medical bill, explain the situation to the provider or contractor and ask to set up a payment plan
  • Ask a family or friends for a small loan to that can be paid back more easily than a payday loan
  • Sell something, such as unwanted gold jewelry or household or hobby items through gold buyers, pawn shops and local classified sites

High-interest credit cards

It is no secret that credit card interest rates are rising. Unfortunately, credit card companies have found a growing market for high-interest credit cards among those who may lack a sufficient credit score to get a more reasonable, lower-interest-rate card. If you are carrying one or more high-interest credit cards in your wallet and maintaining a large or growing balance, it may take years to pay off, especially if you are only making minimum payments.  

To help get out from under this common credit trap, you need to be willing to take drastic actions, such as:

  • Stop using these cards and switch to cash to keep from the problem from getting worse
  • Find a part-time job and using the earnings specifically to pay off this debt
  • Negotiate with the creditor for an interest-rate reduction that will enable you to help prevent the balance from growing larger
  • Cut your budget drastically in other areas so you can pay off this debt as quickly as possible

Rent-to-own appliances, furnishings and electronics

While it may seem like a great way to buy the appliances and furniture you need at a price you can afford, a recent investigation by Consumer Reports found that consumers who rent-to-own end up paying exorbitant interest rates, sometimes as high as 300 percent.

For example, a Toshiba laptop that retails for $612 was being offered on a rent-to-own basis for $38.99 a week for 48 weeks, which totaled $1,872 before taxes and other charges. That’s more than triple the retail price.

It may seem like a good way to avoid using credit, but there are better options. Consider borrowing money from a friend or family member or buying used products on sites like eBay or Craigslist.

Other traps to avoid

  • Credit cards with hidden fees 
  • Predatory lending schemes

When managed wisely, and carefully selected, credit options such as car loans, personal loans and mortgages, allow families to pay for big ticket items they would otherwise not be able to afford. Poor credit options, however, like the credit traps mentioned above can harm your financial future for years to come. The best way to ensure that you are on the path to financial security is to empower yourself by learning about credit traps and other financial mistakes and how to recognize and avoid them.

Call (888) 983-3240 for more information.

Published April 15, 2016

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