Be Careful Where You Get Credit - Powerpoint Slides

Consumer Action’s Managing Money Project

Be careful where you get credit

Not all credit is good credit

Managing Money Project www.managing-money.org

Not all credit is good credit

Some loans are “predatory” Designed to prolong the debt Make the most money off the borrower

Some loan offers are scams Be cautious of any loan offer in which you are asked to

pay money up front


Where can you get credit?

Credit is available from many sources Not everyone can qualify for all loans It pays to get all the facts before you borrow Loans are legal contracts

Read all the fine print If you are deceived, contracts may be void


Banks

Banks make “secured” and “unsecured” loans When you take out a secured loan

You must guarantee the loan by putting up some personal property

such as a car or your home

Unsecured loans Usually for smaller amounts of money Made to people with excellent credit


Credit Unions

You must be a member of the credit union in order to get a loan Credit unions offer secured and unsecured loans Often have lower interest rates on loans than banks

Can you belong to a credit union? Ask at work, your church or your union Check to see at www.cuna.org


Credit Cards

Credit cards are issued by banks and credit unions Use them to buy items or services

You can receive cash advances but these are an expensive way to get cash

All cards have a credit limit Charge more than your limit and you’ll be charged a fee

If you don’t pay your card’s balance off each month by the due date, you are charged interest

If you are late with a payment, you will be charged a late fee up to $39

Your interest rate might jump, too


Low Limit Credit Cards

Some companies issue low credit limit cards to people with poor credit

Credit limits are $500 or less Very aggressive fees on low limit cards Easy to exceed limit

Companies issue more than one low limit card per customer


‘Unsecured’ Credit Cards

Offered to people with poor credit High upfront fees and other costs

Fees appear on first billing statement Low credit limits Fees eat up your credit limit


Charge Cards

Charge cards, like credit cards, allow you to charge purchases

You must pay your bill in full each month, which avoids interest payments and helps you manage spending

Unlike credit cards, you can’t carry a balance on a charge card


Retail Charge Accounts

Some businesses such as hardware companies or other local stores allow you to buy goods on credit

You must apply for these accounts You sign for purchases

The store sends you a bill each month You must pay immediately If you do not pay the bill in full, an interest charge is

added


Finance Companies

Finance companies lend to people who are high credit risks The rates tend to be much higher than bank loans

Many finance companies offer auto and home equity loans Used car loans can be especially high priced You must pay off the loan even if the car can no longer

be driven


Installment Plans

Many stores allow you to buy things on time, such as household appliances

You make a down payment and then pay the balance plus interest on a monthly basis

Zero percent interest offers Pay the entire balance off within promotional period If any of the balance remains after the promotional period

ends, you’ll be hit with retroactive interest on entire balance If you fail to make a payment the store can repossess the item


Rent-to-Own Stores

These stores have new and used household items that you can rent by the week or month or that you own after making a set number of payments You agree to make weekly payments for as long as you want

the item You have the option to buy the product if you make all the

required weekly payments, usually for a year or more This is a very expensive way to buy things

A $200 TV can end up costing well over $1,000 If you don’t pay, the store will take the item back and you will

lose all the money you’ve paid


Illegal Lenders

Some lenders (“loan sharks”) operate outside the law They charge very high interest rates These lenders often use threats of violence to get people

to pay


Money Shops

Companies offer “quick money” to people in desperate circumstances These often are very bad deals

Some loans offered by walk-in, storefront lenders have interest rates of above 20% High late fees drastically increase the amount you owe if

you miss even one payment


Payday Loans

Check cashers offer to make short-term loans or cash advances secured by personal checks or your next direct deposited benefits check or paycheck

The price of such loans is very high Check cashers are making payday loans at effective

annual interest rates of well above 250% People who don’t pay can be pursued under bad check

laws


Pawnshops

Accept personal property, such as jewelry, electronics, cameras, musical equipment or guns, as collateral for loans based on the value of the goods Most pawnshops will lend you less than half an item’s resale

value You have several months to repay the loan and are charged very

high interest rates until you do so Many pawnshops also charge storage costs and insurance fees

If you do not repay the loan, or if you default on interest payments, the pawnshop can keep and sell your things


Car Title Pawn

A twist on the pawnshop, these companies ask you to sign over the title to your car as security for a loan representing only a fraction of its value Interest payments and fees quickly add up, making it

hard or impossible to repay the debt If you default, the company takes your car and sells it

You could lose a car worth tens of thousands on a loan of a few hundred dollars


Debt Consolidation

Loans to pay off your creditors Charge very high interest rates and fees


Home Equity Loans

Banks and other reputable companies allow you to borrow money against your home’s equity Your equity is the estimated value of your house minus

the amount you still owe Your home’s value is the guarantee that you will repay

the loan Unscrupulous lenders might give you a loan they know

you can’t repay just so they can take your home If you are unable to make the payments, you can lose

your home


Tax Refund Loans

Loans are made based on federal and state tax withholding on your W-2 form Why pay to borrow your own money? Electronic filing means you can get your refund in 8-10 days Free tax assistance available

Interest rates on these short-term loans can be very high—40% at the low end and 200%-plus on the high end

Now companies are making loans based on your pay stubs—before you even get your W-2


About the project

Managing Money was founded using a cy pres award from the Griego v. Rent-a-Center class action settlement. © 2007


Consumer Actionwww.consumer-action.org

221 Main St., Suite 480San Francisco, CA 94105Phone: 415-777-9635E-mail: [email protected]

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