Credit Basics — Types of Credit to Avoid

Types of Credit to Avoid

Paying close attention to what kinds of credit you use can help you avoid an interest rate that is too high, or terms that require payment on a schedule that will not work for you. It’s best to avoid “instant” loans and offers of easy credit regardless of credit history—these products generally have very high interest rates and could even be scams.

It’s a good idea to do your research and use caution before applying for the following types of credit:

Instant “payday” loans

These short-term loans usually have to be paid back with your next paycheck. Typically, “payday” loans carry very high interest rates or fees with APRs in the hundreds, according to the Federal Trade Commission. The lenders will often advertise guaranteed loan approval without a credit or background check.

“Payday” loans won’t help you build a good credit history and they could hurt your credit history if you don’t pay the loan back on time.

Car title loans

Car title lenders will loan you money using your car’s title as collateral. If you are late on a loan payment, your car can be repossessed. Like payday loans, the annual interest rate on these loans are very high, and there may be added fees.

Tax refund anticipation loans

Some tax services companies will prepare your IRS tax return and advance you the refund – minus their fees, which can be hundreds of dollars. However, if you wait a few weeks, the government will mail your refund or deposit it directly into your checking account for free.

Deceptive ads and scams

You’ve probably seen advertisements like this, claiming, “Anyone can qualify for a major credit card! Have bad credit? No problem!” These ads may sound good if you have a poor credit history, or don’t have credit at all. But these offers could be scams.

When it comes to credit offers, there are a few red flags for potential scams:

  • Offers of easy credit. Remember that old adage: if it sounds too good to be true, it probably is.
  • A ‘900’ number. Calls with a ‘900’ prefix mean you (the caller) will be charged for the phone call, and you may never receive a credit card.
  • Cards offered by “credit repair” companies or “credit clinics.” These businesses may offer to clean up your credit history for a fee. Instead, you can correct genuine mistakes or outdated information yourself by contacting credit bureaus directly. Remember that only good credit habits and time will restore your credit score.

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This site is for education purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.