Topics:Credit Advice Choosing a Loan Loan Comparison Establishing Credit Credit Builder Loans Secured Credit Cards Retail Credit Cards Payday Loan Advice Credit Invisibility Financial Health Job Hunting Financial Tools
December 8th, 2020
April 8th, 2021
Let’s be honest. Most people rarely think of payday loans as a viable lending option. And there are a few reasons why. For starters, payday loans can have fairly high interest rates and often require repayment in one lump sum. They also are designed for certain, short-term circumstances that many people might never experience. What also may push someone away from payday loans are the myths that have been going around. Maybe you’ve heard a few payday loan horror stories from people, or you read a few articles online about payday loans and those gave you a false sense of the payday loan process. Although some of the payday loan worries and information you’ve accumulated may be valid, it’s important to know the truth about payday loans and put those lingering myths away for good before you or others get negatively affected by the circulation of misinformation. Myth #1: It takes a lot of effort and time to get a payday loan The truth — In general, the payday loan funding process can be fairly quick, especially in comparison to other loan types. Those who take out payday loans typically receive the funding they need in about one business day. And, in terms of effort, it’s not as hard as some people may think to get a payday loan. According to Investopedia, “the qualification and loan application process can be as fast as 15 minutes if you can quickly show you meet all of the requirements.” The article also states the payday loan borrowers must be 18 years or older and have the following to qualify for a payday loan: Active checking account Valid identification Proof of income Most borrowers also don’t have to have a credit check when applying for a payday loan, which means that those with poor or bad credit can easily obtain this type of loan. Myth #2: Payday loans are only for people who are very broke The Truth — As mentioned above, payday loans are designed for people who need fast funding, and that doesn’t necessarily mean only those who are broke. Although payday loans can be useful for people who are low on money in general, they also can be used by those who are experiencing last minute or emergency-type situations. For instance, payday loans could prove useful for people who are experiencing a family emergency and can’t afford to empty out their bank account to pay for a medical procedure with last-minute notice. This truth can be backed up by the design of the payday loan process itself. Payday loans are designed to be paid back by the time the borrower gets their next paycheck. Those who aren’t necessarily in the ‘broke’ category who take out payday loans for an emergency will be more confident with their repayment because they know they can pay back the loan in full the next time they get money put into their account. The risk is generally lower for these people. Myth #3: You have to have good credit to get a payday loan The Truth — Payday loans are different than other loans in terms of credit. In general, you do not typically need good credit to get a payday loan. Payday loans can only sometimes affect your credit because they have such short repayment terms, and therefore, are more likely to be paid back on time. Along with their short repayment process, payday loans can be easier to pay back in full because they provide lower loan amounts to begin with. Typically, a payday loan will provide only a few hundreds of dollars worth of funds. Myth #4: Payday loans are nearly impossible to repay The Truth — As mentioned above, payday loans do not provide consumers with large funds. Instead, they’re designed to provide just enough funding to get people through a financially tight event until they get their next paycheck. Because payday loans offer a smaller amount of funding than traditional loans and they have shorter repayment terms, they can be easier to pay back than other loans. According to the Consumer Financial Protection Bureau (CFPB), “to repay the loan, you generally write a post-dated check for the full balance, including fees, or you provide the lender with authorization to electronically debit the funds from your bank, credit union, or prepaid card account.” It’s important to know, however, that payday loans can be a more costly option if you have to pay a lot of additional fees and costs. In general, it’s best to know what fees and costs are going to be charged before you take out a payday loan. It’s not unheard of for payday loan lenders to charge a customer service fee, late payment fee, a loan application fee, rollover fee, verification fee, and more. Myth #5: All payday loan lenders are scammers The Truth — Although some payday loan lenders do charge hidden fees, lack communication, and do not operate with ethical practices in mind, it’s important to note that not all payday loan lenders are intentionally scamming average consumers. When trying to find a legitimate payday loan lender, you can: Read payday loan reviews on each lender you’re interested in borrowing from. Conduct thorough research on the lender company. Find out if they are a licensed payday loan lender in your state and check their reputation. Ask your lender for information regarding payday loan fees and costs before you take out the loan. Know their loan repayment and rollover process. Be familiar with your state’s payday lender laws and regulations, and be familiar with the payday loan process and terminology. Know that these are only a few things you can do to avoid payday loan scams. The more you learn about the different lenders out there and your state’s payday loan laws, the easier it’ll be to find a legitimate lender. Important things to note When it comes to payday loans, there are a few key things to keep in mind: Some states do not allow payday loan lending or have certain regulations/restrictions with payday lending within their state. Some lenders may charge additional fees for taking out a payday loan (i.e. late fees, rollover fees, etc.). It is possible for your payday loan application to get rejected. Payday loans may not always be your best option — make sure to consider your other options first. The bottom line Overall, you should know that payday loans are not for everyone. That can’t be stressed enough. And, you could say that about most loans. For instance, although personal loans may suit more situations, that doesn’t mean they are necessarily the right option for everyone. It’s important to keep that and the myths mentioned above in mind before you completely dismiss payday loans and continue the spread of payday loan rumors. Additionally, it’s vital to know the in’s and out’s of the payday loan process and know all of your options before deciding to get one yourself or recommending them to people in your close network.
What is a payday alternative loan, and how can it help me? If you are among the millions of Americans struggling with access to mainstream credit, this one's for you. If an unexpected expense were to come up within the next month, what would you do? Say that your heater broke or your car broke. How would you pay for it? For many of us, the answer is we wouldn't be able to pay, or we would need to get a short-term loan. People in both groups should know about this loan product: a payday alternative loan. Similar to its uglier step-sister, the payday loan, this is a short-term, small-dollar loan. However, where it differs is in the way that you access it, the way that it works, and how much it costs. What are payday alternative loans? To help unbox this topic, Xavier Epps, founder and CEO of XNE Financial Advising shares the basics: "Alternative payday loans are provided by federal credit unions and offer higher loan amounts with longer repayment schedules at lower rates." He adds, "Credit unions do not require borrowers to have good credit to qualify, and work with borrowers to improve their credit." Before there were PALs, there were just payday loans, also known as cash advances. These have been around for a long time. Check out this 1937 photo of the Liberty Finance Company, in Oklahoma City, Oklahoma: This isn't a new concept. Payday Loan Basics As a quick recap, Epps helps us sum up the basic ideas behind this type of loan: "Payday loans are high interest loans of generally smaller money amounts that are to be repaid in about the time of receiving your next paycheck or in about two to four weeks from the date the loan was made." He adds, "According to the Consumer Federation of America, payday loan APRs are usually 400 percent or more. Since lenders do not check credit, applying for a payday loan does not affect your credit score or appear on your credit report." Finance expert Gordon Polovin serves on the advisory board for Wealthy Living Today. He explains, "A payday loan is, in most cases, a "desperation loan" for those working individuals in need of urgent cash and nowhere else to turn. As it implies, the payday loan runs from one paycheck to next (i.e., weekly, or monthly)." "Generally," he adds, "payday loans are for a few hundred dollars only. Rollovers are common, coming into play when the borrower is unable to close the loan out at the agreed time. Depending on the state, and depending on the deviations from the original contract (e.g., rollovers) the interest rates and additional fees are in loan shark territory. If you extrapolate them on an annual basis, it can go as high as 400 percent annually. To reiterate, the only good thing about getting into a payday loan channel is that it's likely for less than $1,000. The bad news is that a great many borrowers, once in, can't get out and go from paycheck to paycheck just settling the costs but not denting the principal amount." For years, payday loans were the only alternative for people who didn't qualify for a loan that requires a credit check. This type of retail consumer-facing loans are similar to auto title loans, which are a few steps above a pawn shop. Payday Alternative Loan (PAL) Basics In 2010, the National Credit Union Administration (NCUA) began offering PALs, with principal loan amounts from $200 to $1,000 and loan term lengths from one month to six months. A PAL is different from a payday loan, in intention and in practice. "In short," advises Polovin, "these are payday loans, but with a good measure of discipline so that it doesn't become a bottomless and dark borrowing pit." However, the big difference, he says "is fundamental to the intentions of the lender. A payday loan lender milks borrowers for all they are worth if push comes to shove, within the limits of state laws. Conversely, Credit unions are non-profit, cooperative organizations, designed to serve the interests of its members.Not everyone qualifies as a member, but if you do, and if the credit union offers PALs it's a far improved alternative to the payday loan route.The starting intention of the PAL lender is to help your cause (albeit still in the desperation arena) and not take advantage of your financial weakness." Benefits of a PAL It's nice to have someone in your corner when an unexpected problem comes up. Logan Allec, a CPA and owner of personal finance site Money Done Right helps explain: "Payday loans are notorious for being extremely expensive due to abnormally large interest rates and punishing terms that can trap someone in debt." Consumers who are able to get a PAL instead of a payday loan will benefit from lower cost to borrow and fewer debt traps. Lower cost to borrow "A payday alternative loan from a credit union will likely have better interest rates and terms," advises Zina Kumok, a personal finance expert for DollarSprout.com. "Plus, they're less likely to be predatory and more able to work with you." "In almost every case," she adds, "a payday alternative loan is better than a payday loan. A payday loan has incredibly high-interest rates, often exceeding 300 percent APR. That means you could wind up paying more in interest than you originally borrowed." "If you are looking for a lower interest rate," agrees Allec, "then a payday alternative loan will be a much more affordable rate to get." How so? "Local federal credit unions have a rule that they cannot charge more than 28 percent interest, while a payday lender has no such rule," explains Allec. Fewer debt traps "PALs don't allow you to dive too deep, limiting the PAL amount to $200 on the bottom-end and $1,000 on the top," says Polovin. "There's a cap on interest rates annualized at 28 percent, with a $20 processing fee." How does this help? "Many people who take out payday loans end up renewing them several times before paying them off," says Kumok. "This means the interest will capitalize several times before the borrower can pay it back." The payday loan rollover is problematic for many borrowers. This can turn into a cycle that is hard to come back from. On the other hand, the aim of PALs is to be a healthier borrowing option for those with credit issues. Hence, explains Polovin, "Rollovers are forbidden, and the borrower must settle the PAL within half a year with an installment plan in place. No borrower can obtain more than one PAL in any six months." Challenges Although these official payday alternative loans offer many easy-to-see benefits, the following factors make PALs a little harder to adopt for consumers: Payday loans are easier to access Payday loans are less restrictive Federal regulations limit PAL amounts to $1,000 Payday loans are easier to access Another way that PALs differ from payday loans is in the ease of access. "While payday loans are more expensive, their benefit is that they are relatively easy to get and less restrictive," says Allec. "Most towns will have a few storefronts that offer payday loans with relatively few questions asked." Epps adds, "In 2015, there were more payday lender stores in 36 states than McDonald's locations in all 50 states, according to the Consumer Financial Protection Bureau." Additionally, not all credit unions offer PALs. So, just because you are a member of a credit union, doesn't mean that this will be an option for you. "In 2017, only one in seven of the country's 3,499 federal credit unions offered alternative payday loans," says Epps. On top of that, he says, " For those that do, you must be a member of the credit union for at least one month," before you can be eligible to get a PAL. So, people who are caught by unexpected expenses won't be able to get one for at least a month if they aren't already a member. Payday loans are less restrictive Not only are traditional payday loans easier to access, but they "are also less restrictive," says Allec. "For example, there is a limit to the number of payday alternative loans you can get in a six-month period but no such limitations for payday loans." PALs have lots of rules and stipulations. Federal regulations limit PAL amounts to $1,000 The upper limit of a PAL is $1,000. What if you need more than $1,000? "If you need more money, then a payday loan could be what you are looking for," says Allec. "While some payday lenders may have limits to how much you can borrow, a payday loan does not have a federal restriction on how much you can borrow." That will be up to the payday lender itself. "Therefore," Allec sums up, "the decision on what type of loan might be right for you could be made for you, depending on how much you need." Action steps: How to get a PAL? If you are someone who is living paycheck to paycheck, the stress is real. Wouldn't it be nice if you had a friendlier fallback plan than a local storefront lender? With the one-month membership restriction, you need to think about joining a credit union now, rather than waiting until an unexpected bill or expense catches you off guard. Here's what to do: If you are already a member of a federal credit union, ask if they offer PALs. Polovin warns: "Understand that not all credit unions offer PALs, so that's an essential item to check out." If you aren't a member of a credit union already, check out your local options. Zumock suggests, "If you already have one near you or associated with your neighborhood or employer, that might be your best bet." Find federal credit unions near you via the government's Credit Union Locator. Do this now. If you wait until you actually have an emergency to cover, you won't have been a member long enough to take out a PAL.
"It is important to know that millions of Americans rely on payday loans each year to handle emergencies." says Carey Zielke, personal finance expert for Realities and Dreams. Payday loans are often referred to as predatory, but they still stick around in America. Consider this: According to a Federal Reserve report released in May 2019, four in ten adults would have difficulty covering an unexpected $400 expense. Twelve percent of adults would be unable to pay the expense by any means, and 2 percent would use a payday loan, deposit advance, or overdraft their accounts to cover the expense. A term common in the short-term lending industry is a payment rollover, or a loan rollover. This is when a borrower can't make the payment in full and takes an option to roll the loan payment over, for more time to pay it off. To consumers who rely on short term lending, a rollover can be helpful, but also harmful. Let's explore how and why. How does a loan rollover work? "First, we need to clear up the term rollover," says Zielke. "A payday loan rollover can mean two different things: Consolidate the loan into an installment loan. Pay the outstanding interest and extend the due date." In addition to these two instances, there is a third that is common in the payday lending industry. Jacob Dayan, CEO and co-founder of Community Tax and Finance Pal explains, "Another way to roll over a loan is if the borrower takes out a new loan in order to cover the previous loan." "The second option, and most common," says Zielke, "is accompanied by a fee, usually an interest rate increase." To better understand what this means, Zielke shares an example: "Basically, if you have a $300 payday loan with a 15 percent interest rate on a 14-day term, you can pay $45 to extend the due date another 14 days. The fee for this will be an interest rate increase, most likely another 15 percent. The loan interest rate is now 30 percent. If you still can’t afford to pay it off, you can roll it over again by paying the $90 of interest, for 14 more days. Now your interest rate will be 45 percent." With a rollover, the cost of a short-term loan can clearly add up. Essentially, you are paying more money so that you can delay your payment, says Xavier Epps, founder and CEO of XNE Financial Advising. He adds, "You will still owe the same principal and fees associated with the loan. If you are seeking to rollover your loan, expect to end up paying more than what you would have paid, had you originally finished paying the loan off on-time." Are loan rollovers regulated? Robert L. Föehl, Esq., Executive-in-Residence for Business Law and Ethics at Ohio University explains, "The federal Consumer Financial Protection Bureau and states have been particularly concerned about payday lending activities, including rollovers. A number of states require a ‘cooling off’ period after a payday loan comes due. This is a period that must elapse before a borrower can roll over the payday loan. The CFPB has issued a rule related to various aspects of payday lending as well." When is a loan rollover helpful? To help us understand how and when this loan option can be a positive thing for consumers, Professor Foehl, shares some details: "The helpful aspect of payday loan rollovers is that they enable borrowers to extend the repayment period of their loan. This is particularly helpful when the anticipated source of funds for repayment doesn’t materialize for the borrower." "For example," he says, "a borrower may take out a payday loan for emergency car repairs, believing that the short-term loan can be paid in full from the borrowers upcoming paycheck(s). However, the borrower may not be able to work the regular number of hours he usually works because of the lack of reliable transportation. As such, the actual paycheck is less than what was initially anticipated." Föehl adds, "It is important to remember that payday loans are designed primarily for individuals who are living paycheck-to-paycheck and qualify for few, if any, other types of credit products. Payday loans exist to serve these individuals, who are underserved by traditional lenders." These are people with bad credit or no credit score, also known as credit invisible or credit unscorable consumers. When is a loan rollover harmful? Just as a loan rollover can be helpful to the consumer who is having trouble making a loan payment in full, there are also times when it can really harm a borrower's finances. Professor Foehl explains, "The concern with payday loan rollovers is that they are usually accompanied by additional fees (after all, the payday lender needs to be compensated for the additional risk of loan default). These fees are usually rolled over into the new loan. In the circumstance where the borrower hasn’t made any payment toward the loan, the loan amount actually increases." Now imagine how hard it would be to make the payment, if your loan keeps growing, but your earnings stay the same. "Multiple rollovers exacerbate the problem," he warns. "A borrower can get into a cycle of rolling the loan over and over, increasing the loan amount due to the additional fees, until the borrower is unable to pay back the total amount lent." What is a cycle of debt? "A loan rollover is harmful because it can lead to a cycle of debt," explains Dayan. "If the borrower is unable to pay off their debt, they are continuously trying to extend their loan due date or take a new loan in order to pay the first loan off. By choosing to rollover their loan, the amount they're borrowing increases and it will become difficult saving enough money to pay off the entire loan." Sara Nelson-Pallmeyer is Executive Director of Exodus Lending, a non-profit that helps consumers refinance these expensive loans. As a non-profit, Exodus charges no interest or fees. She explains a bit more about how one rollover can easily put someone into a cycle of debt: "Loan rollovers are the result of people not being able to repay their payday loan, including hefty fees, which are due in full on one's next payday. Borrowers end up taking out a second loan to repay the first, a third to repay the second, a fourth to repay the third, and so forth. Each of these new loans (after the first) is a rollover." "Typically," she adds, "people end up spending more in interest and fees for their loans than the amount that they borrowed in the first place." What can borrowers do to stay safe? As we mentioned before, payday loans exist because people without any access to mainstream credit need them. We asked our financial experts for advice on handling or managing payday loan rollovers and personal finances. Here's what they said: Nathan Wade, Managing Editor for WealthFit Money"The biggest reason why you shouldn't take part in a loan rollover is that you will have to pay more long-term. Although it may seem beneficial in the moment since you will have more time to pay it off, you're having to pay more. " "Don't borrow with credit cards. If you can't pay your credit cards in full every month then you probably shouldn't be using one. Utilize cash or a debit card until you're comfortable with your spending. Create a spending plan that lays down how much you can spend and how much you're actually spending. Start by budgeting living needs such as food and housing, then start to include expenses that you need and not just 'want.' This means you might have to change your spending habits, like canceling cable services. You should also pay attention to how many times you eat out or attend expensive events. Making these small changes can make a huge difference in your budget and help you escape the cycle of debt." Xavier Epps, founder and CEO of XNE Financial Advising"Make sure that you do not frequently roll over your loans your total balance can quickly increase by hundreds." Carey Zielke, Personal Finance Expert, Realities and Dreams"My number one recommendation for everyone is to save some money, three to six months of living expenses as an emergency fund. I understand that will take a substantial amount of time to accomplish, and sometimes is not even possible depending on our financial situations. To start this process, at an absolute minimum, save up $1,000, and use it ONLY for emergencies!"
When you apply for a nontraditional loan, alternative credit reporting agencies (CRAs) are often used. But what is an alternative credit reporting agency exactly? And where do they get your information? Let's start with what we know. "Banks (traditional and online), mortgage loan lenders, auto loan lenders, credit card issuers, and student loan providers all use credit reporting agencies to determine if a borrower is eligible for loans or lines of credit," explains Xavier Epps, Founder and CEO of XNE Financial Advising. This is pretty standard. When you apply for a credit card or a loan, the lender requests information about your credit history from one or more of the national credit reporting agencies (NRCAs). "There are three main credit reporting agencies: Equifax, Experian, and TransUnion," says Jared Weitz, CEO and Founder of United Capital Source Inc. "These three are what build and report your credit score and credit history." The Big Three A CFPB white paper gives us the following facts: The big three CRAs collect and maintain data on more than 200 million adults. They gather data from more than 10,000 sources. Monthly, these sources provide CRAs with information about more than 1.3 billion credit accounts or other trade lines. "The Big Three collect information on our ability to manage financial obligations," explains Epps, "however, they are usually limited to loan obligations." But what if you haven't had any mainstream loans or credit cards from banks, credit unions, or nationwide credit card issuers? If that is the case, you are likely struggling with access to mainstream credit. You are among the 1 in 10 American adults with limited credit history. Limited credit history means that the Big Three don't have enough information on you to formulate a credit score. When applying for a loan or line of credit with a company outside of the mainstream, alternative credit reporting agencies are often relied on to help vet loan candidates. Alternative CRAs Experian and company aren't the only companies collecting information about you. There are lots of other alternatives vying for competition in the credit reporting world, collectively referred to as the "fourth bureau." They don't all collect the same information, however. "There are nearly 40 alternative credit reporting agencies, most of which offer more niche credit reporting information from tracking rent and utility payments to monitoring checking-account management and insurance consumption," explains Epps. What are alternative CRAs? "Alternative CRAs are credit reporting agencies other than the three most widely known," explains Faith Stewart, finance writer at Credit Suite. She adds, "Most personal credit scores come exclusively from the big three, but in the world of business credit, there has been an increase in the use of other, alternative CRAs." Alternative CRAs "are reporting agencies that generally focus on different types of accounts such as employment, housing, checking accounts, payday loans, and other types of accounts not included in a big three report," clarifies Joseph P. McClelland, III, a consumer credit protection attorney in Atlanta, Georgia. The main difference between the Big Three and the various alternative CRAs is the type of accounts they report on, says McClelland. He adds, "When you look at your Equifax report, it will not have information on your checking accounts, for example. If your employer or your new bank wanted this information, they would need to pull a different credit report to find out." "These agencies help the 'unbanked' or those with little to no credit gain credit," says Weitz, by using information alternative to that already listed in your standard credit history. "They determine an individual's credit by their history of paying everyday bills on time such as rent, cell phone, insurance and gas and electric." What different types of information are they gathering? There are specialty information companies for all sorts of fields, from employee and tenant screening, to specialties for medical information when applying for insurances, utilities data, retail merchant data, and gaming data, like VIP Preferred, which collects information to help casinos and racetracks manage risk. For our purpose, let's dive into those that collect and report mainly to lending and banking institutions. Check and bank screening Banks and credit unions use these services to help decide whether they should cash a check for you or let you open a checking account. They want the following information: Unpaid negative balances Unpaid overdrafts Closed accounts If you were suspected of fraud If you have been a victim of bank or check fraud If you have previously had trouble opening or closing a bank account Companies Certegy Check Services ChexSystems CrossCheck, Inc. Early Warning Services Global Payments Check Services, Inc. TeleCheck Services Low income and subprime specialists This group provides information about several things. Each company has its own sources, but these are common: Short term lenders, like payday loans and installment loans Car loans Check cashing Rent-to-own history, like furniture stores Cable and telecom accounts, and other bill payments Credit unions Debt collection companies Subprime home lending companies Subprime credit card companies Banks Retail and consumer finance lending Property records Court judgments Companies Clarity Services (owned by Experian) CoreLogic Teletrack DataX (affiliated with Equifax) FactorTrust (owned by TransUnion) MicroBilt / PRBC Supplemental To help companies manage credit and fraud risk, the following companies sell supplemental information about you to possible lenders, etc: CoreLogic Credco Innovis LexisNexis Risk Solutions SageStream (subsidiary of ID Analytics, LLC) These are just some of the specialty CRA categories. Check out more here. What kinds of lenders use them and why? "Almost all creditors use alternative credit information in one form or another," remarks Weitz. "There are a variety of ways alternative credit information is used to determine a loan approval, but it is difficult for individuals to know what specific information a lender is using behind the scenes to determine your loan approval." Many payday loan companies use info from alternative CRAs rather than the traditional ones. McClelland also adds that "Apartment complexes, banks, and employers will use different CRAs to find more information." This information is used to qualify (or disqualify) you from these housing or lending opportunities. So, is the use of CRAs good or bad? Does it hurt or help you? We got some expert advice on the subject: "It really depends on how your personal credit affects things," says Stewart. "If you have good personal credit, then the use of an alternative CRA that includes that in the calculation can only help you. If not, then it is definitely on the 'con' side." On the other hand, Weitz tells us, "If you have limited or poor credit and are in need of a loan, working with a lender that accepts a score from a CRA is your best bet. If they are willing to accept your report based upon bill payments, you will have a better chance of being approved. From here you can grow your credit score by paying the loan back with on-time payments.” Epps agrees, "A benefit of lenders using alternative credit verification sources is that you can expect an alternative and improved credit score that takes into consideration other financial behavior such as your ability to make rent, cable television, internet and other monthly payments on time." These are all factors that a normal credit score doesn't take into account, but alternative CRAs do. If you are already making regular payments for everyday things like utilities and internet, these can work in your favor. However, this can also hurt you. McClelland warns, "If you have an eviction or bounced checks in the past, this may not show on a typical credit report but show up on a specialty report."
When you need money, most people take out a loan — but what type of loan are you looking for? If you aren't even familiar with the options, you may be wondering what the difference is between a payday loan and a personal loan, and which you should be researching and applying for. To understand which type of loan you are looking for, which you will likely be approved for, and which will best serve your needs, let's break down the differences between these two types of loans and the borrowers that they are meant for. Payday Loans vs. Personal Loans "A payday loan is, in fact, a type of personal loan," explains Helen Chen, Director of My Cash Online, "however, it is provided for a short term (usually to cover costs until the borrower's next salary payment) and generally with high interest rates." In the most basic terms, a payday loan is a short-term, small-dollar loan with high cost to borrow. As its name implies, it is meant to be paid back by the borrower's next payday. For this reason, this type of loan is often referred to as a cash advance or payday advance. What is a personal loan? On the other hand, Chen says, "A personal loan is any amortizing loan provided for personal purposes, such as education, vehicle purchase, medical expenses or other personal expenses. They are usually unsecured, but in some circumstances may be secured against an asset or savings which can lower the interest rate and make it easier to get approval." In general, a personal loan is a longer-term loan that costs less to borrow, but loan amounts are higher than those offered by payday lenders. Is a payday loan or personal loan your best bet? "If you are looking to take out a loan and are trying to decide between a personal loan and a payday loan," suggests Omar Chouche, CEO of Liberty Debt Relief, the two most pressing questions you should ask are 'When do I need the money?' and 'What is my credit score?'" So, let's start by asking just that. 1. When do I need the money? A large factor in your decision, as Chouche mentions, is how soon you can get access to your funds. Let's take a look at the difference between these two types of lenders: Payday Loans Personal Loans "Payday loans usually follow a quick turnaround time, although the exact time varies for each lender," explains Shel Glina, General Manager, FaaastCash. "After approval, some lenders can give you the money within 60 minutes, while some may do it within one business day or more." Kimmy Burgess, Manager of CashInaSnap, adds, "You get the money in your bank account the next business day as the approval process of payday loans is fast and hassle-free." "Personal loans will take you longer to go through the lender's process to be approved, and it will be much more difficult for you to be approved," says Logan Allec, a CPA and owner of personal finance site Money Done Right. "Perhaps the only drawback if you have the credit necessary to secure a personal loan is that, depending on the amount, they can take a few days to process," warns Chouche. "Payday loans have faster turnaround time when compared to personal loans because less is involved in the approval process," observes Robin Williams, an executive at CashOne. However, this may not be the case for much longer. Williams adds, "with many personal loan providers moving online, they have the same processing time like the payday lenders." "Personal loans can take several days for approval due to the documentation involved," confirms Chane Steiner, CEO of Crediful. However, Steiner notes, "If you have good credit and can afford being patient then personal loans are preferred as they typically provide a greater amount of money at a lower interest rate." 2. What's my credit score? The next thing to think about is your credit score. This is going to be the biggest deciding factor regarding which type of loan you can possibly get approved for, and therefore, which type of loan you should apply for. Payday Loans Personal Loans "A low credit score usually means consumers have to resort to a payday loan which can be obtained with no credit or bad credit," says Steiner. Bow how low is low? Chouche observes, "If you need cash right away for an emergency or if your credit rating is below 580, your only loan option may be a payday loan. And these should be your last resort." With most personal loans requiring a minimum credit score in the 600s, if your score is in this range or lower, you may only be able to get approved at a payday lender. "It may be challenging to obtain a personal loan with poor credit history," advises Glina. However, "If your need is pressing but not immediate, and you have a credit rating of 670 or above, your best bet by far and away is a personal loan," says Chouche. Many personal lenders list a minimum credit score of 620, 640, 660, or 680; however, just having that score doesn't guarantee approval, as you may be rejected based on other criteria. After getting these two fundamental questions out of the way, it is still important to know more before you apply for a loan at either type of lender. Check out these additional questions that consumers should ask themselves before applying for a loan. 3. Do I meet the eligibility requirements for these loans? Payday Loans Personal Loans "Payday loans are much more flexible, and lenders usually only require that borrowers have a regular source of income to qualify," explains Williams. For the most part, "you must be 18 years of age, be a U.S. citizen, have steady employment, and not an active member of the military," to qualify for a payday loan Williams adds, "There are other regulations as well, but they vary from state to state." "Personal loans offered by banks and credit unions have strict eligibility criteria, often requiring borrowers to have a good credit score and a strong financial background," says Williams. When it comes to trying to get a loan, we often find ourselves backed into a corner by our financial past, as shown via our credit report. If you have bad credit, you are less likely to get approved for a loan of any kind; however, many payday lenders cater to customers with bad credit or no credit. That's how they stay in business. However, Williams warns consumers that " even though many people with poor credit get payday loans, not everyone is approved for a payday loan." Even payday loans aren't a given. 4. How much do I want to borrow? Payday Loans Personal Loans "If you want to borrow anywhere between $50 and $1,000, a payday loan is the best option," suggests Burgess. However, be aware that there are many state restrictions governing how much you can borrow at a payday lender. As Williams informs, "many states limit payday loans to $500 or less." "You can request a personal loan if you require a considerable amount of money, say $1,000 to $50,00," says Glina. However, in some cases, you can borrow more. "You may be able to borrow as much as $100,000 with a personal loan," explains Williams, "though most lenders only offer around $50,000 to borrowers with excellent credit." Most states have restrictions about how much lenders can offer. "As mentioned above," Williams urges, "check your state website as there will be information about your state guidelines there." 5. What do I need the loan for? Payday Loans Personal Loans "Payday loans should only be used for short term emergencies," advises Robert Linker, Owner of Family Debt Planning. He adds, "Don't get a payday loan unless it is truly necessary. If it's something you want (but don't need), finance it another way." "Depending on your intention with the money, a personal loan will be a better option for a planned project, investment, or long term financial support," instructs Jared Weitz CEO/Founder United Capital Source Inc. Joe Toms, president of FreedomPlus adds, "Few restrictions exist on what you can use a personal loan for, but think carefully whether you really need it. You can use one to pay for a wedding, to fund home improvements, to pay for tiny homes, and much more. Plus, one of the primary uses of personal loans is to consolidate and pay off credit card debt." He adds, "Eliminating credit card debt is one of the best investments you can make, given interest rates on credit cards today. Because personal loans generally offer a lower interest than credit cards, and because there is a strict payment schedule, a personal loan could be helpful if you are truly committed to eliminating credit card debt." No matter your purpose for the loan, Toms instructs, "Ideally, you will save up for major purchases, and not take out a loan, to make sure you are living within your means." However, this isn't always an option for many Americans already struggling to live within their means, especially if something unexpected comes up. 6. How long do I have to pay back the loan? Payday Loans Personal Loans "Payday loans," explains Williams, "have short terms of two to four weeks. They are meant to be paid back on your next pay date." "If you are wanting to take out a smaller loan that you will be able to pay back in full anytime within about two weeks, then a payday loan is the right choice for you," says Allec. "Payday loans are meant to be extremely short-term loans and should not be used time and time again," warns Greg Mahnken, a credit industry analyst with Credit Card Insider. "If you can't confidently pay back the loan before your next payday, you should avoid a payday loan at all costs." "Personal loans usually allow a minimum term period of 12 months and can continue until 7 to 10 years," explains Glina "Most personal loans have terms of 36 to 60 months (some, like FreedomPlus, offer 24-month terms, too) with strict payment schedules," says Toms. "This will keep you on track to eliminate the debt in a timely way; there is no option to just make minimum payments and be paying back the debt for years and years (as is the case with credit cards). But it's critical to make all payments in full and on time. Otherwise, credit profiles will be impacted." While payday loans come with a shorter lifespan, "Personal loans stretch out your payments over a longer period of time, and almost always at a more reasonable interest cost than a payday loan," clarifies Mahnken. "If you need a long-term loan, personal loans may fit the bill at a lower cost than payday loans." 7. How much does each loan option cost? Payday Loans Personal Loans "Payday loans are generally much more expensive, but they don't have strict credit requirements," says Williams. "The cost in payday loan is a fee-based amount that varies per $100 loaned. A general guideline is around $15 per $100 loaned but this varies from state to state." "The interest rates on payday loans are substantially higher than a personal loan and something that many people get caught in a cycle of debt with," explains Weitz. Joe Toms, president of FreedomPlus advises, "A payday loan is typically not a good choice if you need to borrow money. Payday loans can have an annual interest rate of 400+ percent. In real terms, that means that over three months, a $300 credit card loan (charge on your card) at 16 percent interest would cost $12 in interest charges. A payday loan could cost $270. This shows just how costly payday loans can be compared to other forms of credit. Even worse, many people 'roll over' their loans, borrowing the loan again, rather than repaying it. One example from the FederalTrade Commission: the cost of three rollovers on a $100 loan could be $60. Over time, some people wind up giving more than half their incomes to payday lenders." "Personal loans are cheaper, with lower interest rates but have strict credit requirements," says Burgess Interest rates are capped at 36 percent for the most part, but that isn't the only cost. "Personal loans usually charge an origination fee of 1–5 percent of the loan amount," says Toms. "So, they are best if you know it will take more than a year to pay off the debt. Otherwise, with the origination fee, the cost is generally too high." You also need to look out for pre-payment penalties. These will be assessed if you pay off the loan too quickly. Be sure to read your agreement thoroughly and ask questions if it is unclear to you. Payday loans are an expensive form of credit. "If you qualify for a personal loan," remarks Chen, "it is almost always a better option than a payday loan, as long as you have flexible repayment terms so you can close the loan early without penalty." 8. Who will be my lender? Payday Loans Personal Loans "Payday loans tend to be offered by lenders that specialize in short-term lending and check-cashing services," says Williams. These can be found online or at local brick and mortar stores in your community. On the other hand, "Personal loans are offered by banks, credit unions, online lenders, and peer-to-peer lenders," according to Williams. "The best venues to secure [personal loans]," Chouche tells us, "are through banks or credit unions. You can get a loan without collateral at a rate considerably lower than most credit card interest rates." When selecting a lender, Mary Jackson, CEO of the Online Lenders Alliance suggests that we ask ourselves: "Is this lending company reputable?" "Unfortunately," Jackson asserts, "there are a lot of bad actors looking to take advantage of consumers who are in need of short-term credit options. As the CEO of the Online Lenders Alliance, our goal is to police the industry by not only finding and reporting these bad actors, but by setting a high bar and making sure our members meet it. Before any consumer takes out a short-term personal loan, they should review our code of conduct and best practices so they know what they should expect from a lender. For example, our members aren't allowed to use terms that mislead consumers — like "No Credit Check," "Instant Approval," or "Guaranteed." They should also look for the Online Lenders Association Seal, which will let them know that a lender has agreed to abide by our best practices. And if consumers encounter violations of these best practices as they seek the best credit option for their own unique needs, we hope they will report it to our hotline at 1-866-299-7585." Final advice Before you go, we will leave you with some final advice about how to best weigh the positive and negative aspects of both payday and personal loans, when it comes to your particular situation. Jared Weitz, CEO and Founder of United Capital Source Inc. — "A payday loan is a quick way to get cash in a pinch. However, if you are able to wait until your next paycheck or go through the process of applying for a personal loan, your finances will be in a better place." Logan Allec, CPA and Owner of Money Done Right — "If you ask yourself, 'How quickly do I need this loan?', and you find that you answer ASAP/urgently, then you likely need a payday loan. Payday loans are after all a quick way to get cash, but they have an outrageously high interest because of how accessible and simple they are to get. The downside overall is that if you're in an emergency you will need to take out a payday loan and pay significantly higher interest. The upside is that you get the money when you need it for emergencies and don't have to wait for weeks and months to be approved for your loan." Robin Williams, Executive at CashOne — "Last but not least, always remember that payday loans can help in emergency situations, but they are not for everyone. Careful consideration should be given before you decide to get a payday loan. Educate yourself, check your state website, and be sure you deal with reputable companies. Never, ever pay anything up front for any type of loan. These are scams run from offshore companies that often say they are from reputable companies but are not. They are just stealing your money. " Joe Toms, President of FreedomPlus — "A personal loan is a good option for many. Borrowing from family or friends often is not the ideal alternative, but may be better than a payday loan as long as all is decided upon, written down, and signed. In some situations, even a credit card may be better. It's not wise to consider credit cards to pay off other debt, but under a careful program designed to get rid of high-interest payday loan debt, might be helpful. And if things are really tight, you owe $7,500 or more in unsecured debt, and are struggling to make minimum payments, look into debt settlement. Would I benefit from a lower interest rate than if I put the purchase on my credit card? Credit cards can carry interest rates of 15-25 percent. Average rates on personal loans are 14 to 18 percent but can go as low as just under 5 percent to as high as 25 percent. Credit scores play the key role in setting the rate. Independent lenders offering personal loans, however, can look at different factors than would a bank or credit union. Some will talk with the applicant and let the applicant provide additional information about credit scores and profiles, savings, life insurance, and other factors that indicate they are financially responsible. Some lenders even offer discounted rates to borrowers who have a co-borrower or to borrowers with a certain amount of retirement savings." Greg Mahnken, Credit Industry Analyst, Credit Card Insider — (As a personal loan alternative) "If you have good or excellent credit, you may qualify for a credit card with an introductory 0 percent APR rate. These introductory periods usually last between 6 and 15 months. If you can confidently pay off the balance before the introductory period ends, you'll pay no interest on these cards. If you do use a card with a 0% APR introductory offer, understand that you may need to pay more than the minimum payment in order to pay the balance off before the offer ends. If you're using the introductory offer as a short-term loan, avoid putting other expenses on the card. This will make it more difficult to pay off before you're charged interest on the balance.
For underbanked Americans who can't get approved for mainstream credit, it can be hard to find opportunities to build credit. Credit builder loans We asked Zara Mohidin, Head of Strategy and Business Development at Fig Loans, what advice she has for people at the start of their financial journey, seeking credit for the first time. Here's what she had to say: "The first place I would start is with a credit builder loan! It's a super easy, risk-free way to start building credit. What is a credit builder loan? It's a reverse loan, meaning that you make payments into a savings account over the course of one year. Then, at the end of the year, you'll receive all the principal you paid in and your credit score will be improved!" Did you know that credit builder loans are one of the three ways that the Consumer Financial Protection Bureau suggests establishing first-time credit? This type of loan is meant for people with no credit or bad credit. Basically, it helps to establish some positive payment history, which is the biggest factor affecting your credit score. A credit builder is a secured loan. You make payments into an account—often one that accrues interest. Then, once you have completed the loan, you get the money back, and you have an established, positive credit record. You've basically proven that you can handle money wisely and make on-time payments. Next, you can apply for other types of loans, including unsecured credit cards or personal loans, with a better chance of getting accepted. Credit builder loans vs. secured credit cards The CFPB's second suggestion for establishing credit is with a secured credit card, when you don't have enough or sufficient credit history to get an unsecured credit card. A secured credit card is similar to a credit builder loan. The difference is that the consumer puts a deposit into an account up-front. That amount makes up your credit limit, accessible on your card. From there, you can build up your history of positive on-time payments. When it comes to choosing between the two options, you might want to consider your spending habits. Often, credit cards make it easier to feel less inhibited about spending. You will have to be extra careful not to spend more than you can pay off in a month, so that you do incur too much in the way of interest charges for outstanding monthly balances. Remember, that while you may also be required to pay interest on a credit builder loan, you will also earn interest on the CD or savings account where your money is being held. Credit Builder loans are likely the safer option in the long-run. Credit builder loans vs. retail credit cards The CFPB's third suggestion for establishing credit from scratch is with a retail credit card. Nathan Grant, a Credit Industry Analyst from Credit Card Insider helps us compare and contrast these two products and their credit building potential. Grant explains, "Both a retail store credit card and a credit builder loan are using essentially the same methods to help individuals build up their credit scores — making on-time payments month-to-month until your balances are paid down to show that you are a responsible borrower." However, just like secured cards, there are differences. Grant points out that "Credit builder loans are installment loans while retail store credit cards are, like any other credit card, a revolving balance, and having a good mix of types of credit can also contribute positively to your credit scores. With a credit builder loan, you're guaranteed to pay some interest, while you can avoid interest charges by paying off your statement balance in full on a retail credit card. That said, if you fail to pay off your retail card balance by the due date, you'll be stuck earning interest at what's likely a much higher rate than with a credit builder loan." So again, the CBL is the safer option if you aren't confident in your monthly budgeting skills, says Grant. However, you need to think about startup costs and ease of access: "A credit builder loan is generally easier to get with no credit, but you have to pay up front, while a retail card won't cost you anything up front but may be a bit harder to get with no credit." Final advice "Since everyone's financial situation is completely unique outside of just credit scores," Grant explains, "there is no blanket recommendation that would be the go-to choice every time. Your best bet is to self-assess your responsibility and your financial objectives beyond just building credit and see what option makes the most sense for you." Sometimes a mix of different credit building products can lead to the best results, especially if you are financially responsible with them. Shop around to see what is available in your area, or at your local credit union. "It's important to remember that not all credit builders are the same," says Mohidin. "Some credit builder loans actually penalize you for being late by charging late fees and reporting your payment as delinquent to the credit bureaus." That can be a "two steps forward, one-step-back" type of move, where you will lose out on many of the benefits. Fig's credit builder loan doesn't penalize you for late payments. Instead, an account is closed, to save you from counter-product negative reports to the credit bureaus. Other credit builders have different helpful perks. Mohidin explains, "Some of our non-profit partners have even better products that will match every payment you make. For example, a great credit builder product (that inspired our own!) is the LISC Twin Accounts, so be sure to check your options!" You should shop around in your local area to see what credit builder loans are available online, at regional banks, local non-profits, or community credit unions. Special thanks to our expert panel: Zara Mohidin, Fig LoansNathan Grant, Credit Card Insider
The Federal Report on the Economic Well-Being of U.S. Households in 2018 found that 4 out of 10 adults would have trouble paying an unexpected $400 expense, like a car repair. This would lead them to borrow from friends of family, put it on a credit card, sell something, get a bank line of credit, get a payday loan, or, as 12 percent of respondents said, they “would not be able to pay for the expense right now” by any means. While this figure is up from 5 in 10 adults in 2013, it still shows that a large percentage of Americans are left to grasp at straws when they need unexpected cash. Half of American adults either don’t have a credit score or have subprime credit. That stinks, but it stinks even more when you have an unexpected bill to pay. In this article, we are going to talk about red flags to avoid when vetting payday lenders in an emergency. First, how bad is a bad credit score? “Having a credit score at or below 500 makes qualifying for loans incredibly difficult,” says Jared Weitz, CEO and Founder of United Capital Source Inc. “It is at this score range where payday loans become the only option.” For people who don’t have access to mainstream credit, or a family member with the means to lend them $400, payday loans are often the only viable option in an emergency situation. To help our readers choose a safe and trustworthy payday lender or payday alternative, we asked personal finance experts for advice. Here are the red flags they want you to look out for: 1. Online only lenders “They’re only available online. Most payday lenders will have brick-and-mortar stores. There are very few online-only payday lenders that are legitimate businesses.“ — Patricia Russel, CFP, FinanceMarvel (now known as Credit Repair Expert) 2. Loan amounts “They offer you a loan for your full paycheck. You want to avoid this because then if anything comes up at all, like you need to buy food or put more gas in your car, then you won’t be able to repay the loan in full. Because of high interest rates on payday loans, you can end up struggling for years to pay back this loan that continues to grow.” — Russel 3. Upfront payment “A major red flag for working with a bad or scamming lender is if you are requested to pay an upfront fee in order to process your loan. If you receive a payday loan collection call, this is a concern with either a lender you are working with in the past or one you are looking into. The caller may begin to request collection for a payday loan you have and might even be able to share personal information with you as verification. Pay attention to this and be sure to vet out a potential lender by checking websites and customer reviews for feedback.” — Weitz 4. Not stating the APR “Because payday loans are so short term, they typically offer you a ‘fee’ without stating the APR. It makes the number sound more reasonable. When you don’t know the percentage, you don’t realize that it’s several hundred percent. This will matter a lot if something happens and you can’t repay the loan in full on time. That percentage will make the amount grow and grow until you’re in a hole you can’t climb out of. Avoid any interest rate in the triple digits.” — Russel 5. Last minute fees “It is normal to be charged a higher interest rate because you have a bad credit score. It’s not normal to be charged ‘fees’ for a poor credit score. Some lenders will even add these fees on at the last minute, claiming they were mistaken, and you didn’t qualify for the product you came in to sign a contract for. Don’t fall for this.” — Russel 6. Misleading information “If they lie to you about anything, or ask you to lie about anything, run away. It doesn’t matter how small it seems, find another lender. They could ask you to lie about how much money you make on your application, or they could keep brushing away mention of fees without giving you direct answers. Don’t play these games, it means something predatory is going on.” — Russel Special thanks to Patricia Russel from FinanceMarvel (Credit Repair Expert) and Jared Weitz from United Capital Source for their financial advice.
Why can't I get a credit card? If you can't get approved for a mainstream car loan car loan or credit card, it is likely due to your credit history, or lack thereof. Certified Financial Planner Patricia Russell from FinanceMarvel (now knows as Credit Repair Expert) explains: "There are many reasons a company may refuse to approve you for a loan or a credit card. A company's decision is based on two main factors, and that is your income and your credit history." Do you have bad credit? "Having a credit score at or below 500 makes qualifying for loans incredibly difficult," adds Jared Weitz, CEO and Founder of United Capital Source Inc. Russell says, applicants with a bad credit score are typically turned down. When they are approved, it will come with a high interest rate. Weitz explains, "It is at this score range where payday loans become an only option." But what if you don't have a credit score? You aren't alone.Millions of Americans are in the same boat. Check out these crazy stats: Forty percent of Americans can't cover an unexpected $400 expense. And a 2018 report revealed that 1 in 3 adults applied for credit, 23 percent were denied at least once and 31 percent were denied or offered less than they wanted. Getting denied can be a confluence of factors, but credit is a very likely common factor, whether that means bad credit, no credit, or unscorable credit. Are you invisible? "When you go to apply for a cell phone or to rent an apartment or get a loan, companies pull up your credit history," explains Russell. "For most Americans, this will be full of credit cards and loans and other activity in their financial lives. Being credit invisible means that there is no history available. The credit invisible do not have good credit or bad credit. This means that companies have nothing to base their decisions on. They have no indicator whether you would pay your bills on time and don't have a way to decide if they should do business with you and what they should offer you.""Credit invisibility is a major obstacle for many of the nation's citizens," says credit industry analyst Sean Messier with Credit Card Insider. He's got a point: According to the U.S. Consumer Financial Protection Bureau (CFPB), 11 percent or 26 million adult Americans are credit invisible. Russell explains: "The credit invisible are seen as wild cards and too risky to work with, so are also commonly turned down for mainstream credit cards and loans. When an applicant has been turned down by mainstream credit sources, the next best option when money is needed is to find a payday loan to help them get by." Are you unscorable? On top of that, the same CFPB report says that 8 percent of adults or 19 million consumers have an unscored credit record. "Being credit unscorable indicates you have very limited, or thin credit history," explains Weitz. Thin credit history matters. If you don't have six months of credit history, you can't get a FICO score. "[T]his is common," says Weitz, "for young graduates, immigrants or cash-only consumers that have not been making card purchases or building credit." Why does it matter? "When I think about credit invisibility," says Zara Mohidin, Head of Strategy and Business Development at Fig Loans, "I think about a term coined by our partners at the United Way, called ALICE. There's a lot of jargon out there about "underserved" or "underbanked" Americans but what I love about ALICE is that it actually describes the person who is credit invisible. ALICE stands for Asset Limited Income Constrained Employed and it is a new way of defining and understanding the struggles of the households that earn above the Federal Poverty Level but don't have access to mainstream sources of financing. ALICE is your child's teacher, your parent's caretaker, your office clerk, and your waitress. Despite the critical nature of their jobs in our society, ALICE is struggling to make ends meet and a big part of that has to do with credit invisibility. With a lack of access to affordable credit, one unexpected car accident or medical bill can push ALICE over the edge." Additionally, Weitz explains, "Without history, loan offices or credit agencies have nothing to base your financial history from — and this is viewed as a risk for them."What does this mean for you? Ivan Chong, founder of Lazy Finances understands the predicament. He puts it this way, "Unfortunately, it's a catch-22 since having no credit makes it difficult to get a credit card to build your credit." If you lack a credit score, Chong says that security deposits may be required for a cell phone or utility services and car insurance rates can be affected. On top of that, if an unexpected medical bill or emergency comes along, you will have very few options for borrowing money. What do you do about it? "Similar to the general idea, ‘it takes money to make money,' same goes with good credit," says Weitz. "If you have low or no credit, gaining access to build positive credit is difficult. Low-income people have limited cash flow in and out which means gaining credit takes longer. This can be fixed by taking steps to build a credit score, such as recording on-time rent payments or taking out a credit-builder loan through a community credit union." Along those lines, the Consumer Financial Protection Bureau suggests three ways to establish credit from scratch: an in-store/retail credit card, a secured credit card, and a credit builder loan. Let's take a minute to learn more about these three options. 1. Retail credit cards"Retail credit cards are generally issued by a notable financial institution and co-branded with a certain merchant," explains Messier. These are the in-store cards that are often offered to in-store and online shoppers at department, hardware, or clothing stores. There are many variations, but in general, in-store credit cards have the following characteristics: Easier approval for lower credit scores Only able to use them at the retailer in question Higher interest Lower credit limit Often come with rewards for signing up and purchases Russell gives us a rundown: "Retail credit cards are easier for people with a bad credit score to be approved for. They typically have subprime terms written into their normal contracts, so it is normal for them to accept people with lower credit scores. This can give someone with a bad credit score, or someone who is credit invisible, the opportunity to build up credit. These cards are suggested for that as long as you know you need to pay the card off in full every month in order to build a positive history of on time payments, and so you can avoid paying the high interest rates that come with these types of cards. To do this, you'll want to apply for a card at a place you shop often since these cards can be limited in where you can use them. If you are a frequent shopper at Amazon or Target, they have popular retail card offers that are known to report to the credit agencies."2. Secured credit cards"Instead of using a retail credit card to establish credit, consider a secured credit card," suggests Messier. Secured credit cards are issued by all of the big credit card companies, and are often co-branded with a specific bank or credit union. Examples include Discover it Secured, Citi Secured Mastercard, and OpenSky Secured Visa from Capital Bank N.A. Common secured credit card characteristics include the following: Easier approval than unsecured cards Requires you to pay a security deposit The credit limit is a percentage of your deposit (50%-120%) "Use the card wisely by making on-time payments," says Weitz. He adds, "eventually, you will qualify for an unsecured card and receive the deposit back." With an unsecured card, you can officially be ushered into mainstream credit and loan options. 3. Credit builder loans"A "credit-builder loan" is basically what it sounds like: a loan designed solely for the purpose of helping you build good credit," writes attorney Amy Loftsgordon on NOLO. These are often available through online lenders like Self Lender, community credit unions and banks, as well as Community Development Financial Institutions (CDFIs), like Fig Loans. As with the other credit building methods, credit building loans can differ, but they generally include the following characteristics: An initial payment or account origination fee applies Make monthly payments into a savings account Many offer a 20+ day grace period (to help avoid reporting disparaging info to the CRAs) Amounts are generally small $500-$3,000 and last 12-24 months Once you pay off the loan, you can access the account It is important to note that once you take the first few steps towards establishing your own credit, it can take six months or more to get a credit score.
The Consumer Financial Protection Bureau suggests establishing first-time credit with the following products: Retail credit cards Secured credit cards Credit builder loans If establishing credit for the first time seems like rocket science, it's okay. There are rocket scientists to help translate for us. We asked personal finance experts the best ways to help establish or re-build credit. Here’s what they said. Know your endgame "A secured card is a great way to be introduced to, or build back, good credit. These cards are reduced in terms of their credit limit and you must have enough funds to pay the deposit up front. Consider your goal with applying for this card before opening the account; know the ideal credit score you want to hit before moving on to an unsecured card and gaining the deposit back. An unsecured credit card places more trust in you to make smart financial decisions with a larger credit limit and quick access to spending. Not having a deposit requirement means you do not need to save up anything in order to open this account. Be aware of annual fees and review APR to vet out the best card options available." — Jared Weitz, CEO and Founder, United Capital Source Inc. Give yourself a boost “Luckily, new methods are being introduced such as Experian Boost which gives you credit for paying your utility bills and UltraFICO which looks at your bank account transactions and balances. These both give positive boosts to people with no credit or bad credit enabling them to start building their credit responsibly. These are both free which is much better than secured credit cards and secured loans as a first step.” — Ivan Chong, Founder, Lazy Finances Research Fee Structure “It’s a good idea to research secured credit card offers before choosing one. Not only will the interest charged be high, but you’ll want to find out how much you’ll be charged for processing and application fees, as well as annual fees.” — Cara O'Neill, NOLO Try some nepotism “Asking a friend or family member to add you as an authorized user on [their] credit card is another method that works well if they have a long credit history.” — Ivan Chong, Founder, Lazy Finances Bet you can’t have just one “Consider using a credit builder loan alongside a secured credit card, if you’re able — this will diversify your variety of credit accounts, which should help your credit scores.” — Sean Messier, Credit Industry Analyst, Credit Card Insider Thanks to our experts for their helpful advice.
Photo courtesy of the Center for Financial Services InnovationHappy #FinHealthMatters Day! Today, April 25th, the Center for Financial Services Innovation (CFSI) celebrates #FinHealthMatters Day. The purpose of the social media event is to bring awareness to consumers’ financial health. The Center performs research and provides financial service providers with tools to find what customers are struggling with in their financial lives. The following facts are from the CFSI’s most recent U.S. Financial Health Pulse results:Did you know…? 36% of Americans can’t pay all of their bills on time 27% of Americans have subprime credit scores 40% of Americans do not plan ahead financially 30% of Americans report having more debt than they can manage 45% of Americans do not have enough savings to cover three months of living expenses 47% of American report that their spending meets or exceeds their income 26% say that they always exceed their income Of respondents who said that spending exceeded their income in the last year, 43% reported using credit to bridge the gap At Best Company, our purpose is to empower consumers to make the best decisions and connect confidently with companies that deserve their business. When it comes to payday loans, there are lots of lenders that we try to help consumers steer clear of. We recognize that this is an expensive form of credit, but with more than a quarter of Americans in need of sub-prime credit, it can’t be avoided altogether. That’s why we try to help consumers access only the best payday loans from more reputable companies that help people improve their financial health. For example, several lenders offer more lenient payday loans for people with subpar credit, as well as loans that help people build their credit score. For #FinHealthMatters Day, join the discussion online, and give yourself a financial health checkup with one of the tools below: FIST Score: Answer a few simple questions to help gauge your personal financial health. The site offers paid financial planning tools, but the initial scoring is free. Schwab MoneyWise Fitness Quiz: A short survey shows where you are, compared to people in your age range. It also provides articles and tools to take the next steps toward financial stability, like budgeting, paying off debt, and learning about financial goal setting.If you already know that you’re in deep, check out the resources below to help guide your path to better financial stability. It isn’t easy, but maybe by next year’s #FinHealthMatters Day, you will have checked off a few steps. Dave Ramsey Quiz: Answer a quick question about your circumstances and get step by step suggestions from personal finance guru and radio personality Dave Ramsey’s website.Limeade Financial Checklist: A few steps to help you find room in your budget, from this employee engagement company.Credit Karma Financial Tools: Tools to help estimate your credit score and make a debt repayment plan.