Unfortunately, being new to the credit world leaves you vulnerable to abuse by people who know the rules better than you do. Abuses perpetuated on immigrants and credit newbies have been around forever and aren’t about to go away. Here are several that you’re likely to run into, along with some guidelines on how to handle them.
Payday loans
When you don’t have credit but you have an unexpected expense, what do you do? An entire industry has arisen to answer this question. Payday lenders charge a very high interest rate or fee for a short-term loan guaranteed by your next paycheck. The fee is based on the amount of your paycheck, and you must supply the lender with a signed check for the date the loan is due.
It’s not unusual for a person seeking such a loan to need additional money after the lender cashes the postdated check. This can start a vicious cycle of high-fee, high-interest loans rolling over or piling up with no practical way to pay them off. Payday lenders don’t report your loan experience to the credit bureaus, so you receive no credit history–building benefit.
If you must use a payday lender, look for one that’s a member of the Community Financial Services Association of America. Members subscribe to a code of conduct and may offer extended repayment terms if you can’t pay back a loan as scheduled.
Refund anticipation loans (RALs)
Refund anticipation loans (RALs) are high-fee loans secured by your tax refund that may, and the operative word here is may, get you your refund a week or so earlier than having it direct-deposited after filing your return electronically. The real downside of these loans is that the person who sells you the loan has an incentive to inflate your tax refund so you will take out a higher loan.
If your actual refund is less than what you borrow, you owe the difference plus a hefty interest rate. A much better idea is to open a bank account and have any refund direct-deposited. You get it fast, free, and with no surprises.
Check-cashing for a high fee
Going to a check-cashing place instead of a bank or credit union is like shopping at the most expensive store in town in the worst possible neighborhood. Check cashers are often located in places that are rife with crime.
Why? Because everyone coming out has a pocket full of cash. A bank or credit union with which you have an account won’t charge you to cash your check, and you don’t have to take all the cash with you when you leave — you can deposit it in your savings and checking accounts.
Instant credit rating
Credit repair companies may offer you a new identity or a repaired credit rating for only a few hundred dollars. Don’t spend the money. The new identity is often illegal, and the instant credit repair doesn’t exist.
Foreign bank accounts
Occasionally, you may receive a letter or e-mail saying that you’ve been chosen (lucky you!) to help a rich foreign person get some money into the U.S. and that you’ll receive a fat percentage of the amount for your small trouble because you’re trustworthy. Most of these communications come from Nigeria, but they can originate anywhere. Don’t do it!