Often when people turn to credit counseling itâ€™s because they have experienced a financial crisis, sometimes caused by an unexpected reduction in income, or a medical emergency. Credit counseling educates consumers about creating a spending plan, and saving money, while reducing oneâ€™s dependence on credit. While the decision to borrow money whether itâ€™s a credit card, a mortgage, or a student loan always carries a level of risk, there are certain borrowing methods that can be particularly troublesome. Be cautious before borrowing money via the following ways:
Credit Card Cash Advance
This is when a borrower uses their credit card to withdraw cash up to a certain amount. Why itâ€™s risky: Like with a regular credit card purchase, interest will accrue on the borrowed money. The difference is when you charge a purchase to your credit card you have about 30 days to pay the bill before interest starts to accrue. With most cash advances interest will start to accrue right away. The interest rates for cash advances are typically much higher than for purchases. Plus, many banks charge cash advance fees.
A borrower can obtain a loan from a pawnbroker to be repaid at a certain interest rate after securing the loan with a personal item to serve as collateral. If the borrower doesnâ€™t repay the loan as agreed, the pawnbroker can sell the item held as collateral. Why itâ€™s risky: The interest rates charged by pawnshops are generally very high. Plus, if youâ€™re unable to repay the loan, you could lose the item you put up for collateral.
A payday loan is when an individual borrows a small sum of money, and writes a post-dated check to the lender to repay the loan plus the interest charged for borrowing the money. Why itâ€™s risky: The interest rates on payday loans are incredibly high. According to the FTC, the APR of a payday loan can be over 390%. If by the time payday rolls around, the borrower still doesnâ€™t have the money to pay the loan, they will be charged more interest and fees. The longer it takes to repay the loan, the more finance charges are added, and what started as a small loan can quickly spiral into a massive debt. If youâ€™re in a pinch and you need cash, you may think about turning to one of these options. But, whenever high interest rates are involved, you run the risk of getting into a situation where your balance grows to an unmanageable amount. Instead, try to focus on budgeting and creating an emergency fund so youâ€™ll be better prepared if faced with a crisis.
If you feel like youâ€™re overwhelmed with debt certified credit counselors are available for a free credit counseling session.
Melinda Opperman is Senior Vice President of Community Outreach & Industry Relations, Springboard Nonprofit Consumer Credit Management, Inc; and Executive Director, Springboard Education Foundation. Springboard Nonprofit Consumer Credit Management is a member of the National Foundation for Credit Counseling. To schedule an appointment with a certified financial counselor call 800.431.8157, or visit Springboardâ€™s website at www.credit.org.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.