5 Most Common Credit Scams
This content is provided courtesy of Savvy Money.
Credit scams can be expensive and hurt your credit, but most are easily avoided if you keep your guard up. To help you, here are the five most common credit scams and how to avoid them.
- Credit repair: You’ve heard this before -- companies promising to "repair" your credit by removing negative information from your credit record if you pay a hefty up-front fee. The key red flag is the promise to remove legitimate negative information from your report rather than just fixing inaccuracies. Companies try to dispute accurate information and hope that the lender fails to respond in the mandatory 30-day period. This approach is illegal and you should avoid it. Credit repair firms can legitimately help you dispute and remove information you feel is inaccurate, but you can generally dispute this on your own if you simply document and submit what happened.
- Credit rebuilding products: Consumers with limited or poor credit often find themselves in a Catch-22 -- to improve their credit, they need to show they can manage it, but they’re unable to get it. Some unscrupulous companies offer "credit rebuilding" products that they advertise as the first step to better credit. However, these products often come with low credit lines and high fees that can eat up nearly 100% of the balance. The unsuspecting borrower who spends on these cards can quickly finds themselves over their limit, paying fees, and hurting their credit. Make sure to closely look at all fees associated with these products. A secured card (backed by a deposit of your own money) can be a lower cost way to start rebuilding your credit.
- Rent to Own: For people who are short on cash, advertisers promote the ability to purchase big ticket items such as furniture, appliances, or TVs for no money down and without a credit check simply by agreeing to make regular payments.
So what’s the catch? Under rent-to-own you generally pay more, around two times the market price using rent to own because of the interest rate associated to this type of loan. And most credit scoring models will penalize you for a rent to own loan on your report, as it’s correlated with poor credit management.
To avoid Rent to Own, simply save money in advance for a large purchase or try picking up needed items at thrift stores or yard sales.
- Payday Loan: A payday loan is a short term loan designed to be repaid through a checking withdrawal at the next payday. It’s a short-term loan that many use to meet immediate demands like utility payments. However, the fee structure of such loans means that you will pay an annualized rate of interest that’s often over 200%.
Avoid payday loans at all costs if you can by using other sources of cash or credit for emergencies. Avoid all non-essential spending until you can build up a cash buffer to see you through future emergencies.
- Advance-Fee Loans: Similar to credit repair, advance-fee loans guarantee a loan/credit so long as you pay a fee in advance. Don’t fall for this! A legitimate lender will:
- Never guarantee you a loan if you have not yet applied.
- Request a credit report, but never ask you to pay for processing your application
- Never ask you to pay if you have not confirmed the offer in writing or have the offer in your hand
The best thing you can do for yourself is to always do your research before taking on a loan. Try to avoid giving out your personal information unless it is a trusted source.