How to Avoid Sharks While You Climb Out of Debt

Friday, August 25, 2017, 6:00 AM | Leave Comment

One of the biggest challenges with debt comes when it affects your credit, and, in turn, your ability to access financial resources to help mitigate the situation. Low credit can leave you stuck in a no-win situation.

If you’re struggling with financial burdens, you become vulnerable to cynical financial service sharks who make their living profiting from desperation.

There are a number of services out there that offer convenient, upfront money but contain hidden fees or terms that hit you with unexpected interest. You can play their game and win — you just need to go into it with your eyes open.

There are also a number of advisers and credit repair “experts” who peddle bunk advice for upfront fees. These folks you should avoid altogether.

Here’s how to protect yourself from sharks:

  • Identifying Credit Repair Scams

    One of the best ways to increase your access to financial services to improve your quality of life and help you get a handle on your debt is to improve your credit score.

    The fact is that, with the right advice, you can do this yourself without needing to contract outside services, but credit repair services can be a boon to your efforts.

    The right company can help you a great deal, especially if you’ve been the victim of identity theft or have a number of erroneous items on your credit report and are overwhelmed by the magnitude of the situation.

    Here are some ways to identify credit repair scams:

    • Promise of immediate results: Credit disputes can happen quickly, but dispute responses can take up to 30 days.

    • Asking for up-front pay: This is straight-up illegal in the U.S.; credit companies must not charge a fee until their services have been completed. This applies to monthly payments, as well. Don’t pay until the work has been done.

    • Promise to “reset” your credit history: It is not possible to credit companies to expunge accurate data from your credit score, even if it affects you negatively. There is some wiggle room. For instance, data that is deemed to be accurate but unfair can be removed. A good company will explain this process.

    • Opaque business practices: If they don’t tell you what you can do yourself, how exactly can they help, or ask you not to contact credit bureaus yourself? Steer clear.

    A credit repair company can’t do anything to fix your credit score that you couldn’t also do with time and research. They cannot make negative but accurate credit information disappear.

    You can fix your own credit, especially as access increases to free online resources.

    Reputable companies will, however, be able to use their knowledge and leverage to negotiate with creditors on your behalf which could result in solutions you might not have thought of.

  • Payday Loans are a Trap

    Payday loans are one of the most predatory and cynical practices in the financial services industry.

    Payday loan providers target low-income areas that are underserved by other services and proceed to use misleading advertising to trap people in unmanageable debt that could take decades to pay off.

    The classic trick is to present interest charges as if they’re a flat fee. Instead of wording their fees as APR (annual percentage rate), they use a flat dollar amount.

    A $60 fee for borrowing $600 for two weeks sounds great … But what they don’t mention is that if you don’t repay the loan after two weeks, you’ll continue to be charged the loan’s APR rate. In this case? 260 percent.

    Let’s say you took three months to pay that loan off, you would accrue $384.66 in interest fees. So you’d borrow $600 and need to pay back $984.66.

    Even at the higher end of credit card interest rates, around 20 percent, your interest fees over 3 months would be around $30.

    The immediate convenience of payday loans can be very appealing, but they don’t work as advertised.

    They are often considered to be emergency solutions to temporary problems, but PEW research shows that rather than emergencies, most people use them to cover regular expenses.

    If you use one for regular monthly expenses, the chances are you’ll be unable to pay it back on time, as your next paycheck will probably get eaten up by those same expenses.

    Rather than provide relief, the high debt that payday loans incur only serve to exacerbate debt and bad credit reports.

  • Zero-Interest Terms are Dangerous

    Another trap that it can be easy to fall into is the temporary zero-interest credit card promotion.

    Retail stores commonly use this tactic to get customers to sign up for their in-store cards rather than use existing credit.

    Many work to make customers aware of the full terms of this type of borrowing, but some don’t.

    The problem with zero-interest terms is that the interest still accrues over the payment period. These terms do not make interest disappear; it is instead an agreement that states:

    If the balance is paid by the end of the term (usually six or 12 months), then the interest will be waived.

    If the balance is not paid in full, however, even if there is only $1 left and the term ends, that agreement becomes void. The entire interest balance that has been accruing is then added to debt.

    To be clear: if you can’t pay off the entire borrowed amount in time, you will be hit with the (usually high) interest regardless of the interest-free period.

    These are just three ways that your position can be taken advantage of if you’re in debt and need financial aid.

Some general rules do apply:

  • Look for transparency. If a lender won’t explain the terms of an agreement, or tries to obfusticate hard numbers with marketing speak, walk away.

  • Beware people offering quick fixes. Getting out of debt takes time and careful planning.

  • If a loan payment is worded as a flat fee, the lender is likely trying to hide a high-interest rate.

  • Never pay for services before you receive them.

Have you had experiences with these types of sharks? Let us hear about them!

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