Four Types of Credit to Avoid

Not all credit is created equal. Here are a few that could do more harm than good


Not all credit is created equal. Here are a few things to watch out for when it comes to credit.

As a consumer, you should always make an education decision about taking out a loan. Loans aren’t free money—they’re often formal agreements with strict terms and timelines. It’s important that you know who you’re borrowing from and the terms of the loan first, as high interest rates, added fees, short payment schedules, and even repossession may be included in the terms. And in some cases, easy credit offers might even be scams.

Protect yourself—and your credit—by watching out for these red flags when applying for credit.

1. Instant “payday” loans

Short-term “payday” loans—loans that have to be paid back by your next paycheck—usually won’t help build your credit, but they can damage it. That’s more likely, too, unless you’re able to back it with your next paycheck. If you can’t, expect your payments to have very high interest rates or fees with APRs (annual percentage rates) in the hundreds, according to the Federal Trade Commission.

Red flag: Watch out for a loan that does not require a credit check or background check.

2. Car title loans

A car title loan uses your car’s title—the document that states who legally owns it as collateral for the money you borrow. Use caution here, unless you’re confident you can make payments on time. If a loan payment is late, there’s a chance your car could be repossessed. Like payday loans, the annual interest rate on these loans can be very high, and there may be added fees.

Red flag: Be wary of a loan that uses your personal property as collateral.

3. Tax refund anticipation loans

Having your taxes prepared for you with quicker access to your refund can sound pretty tempting, but watch for the inevitable catch. Some tax services companies will prepare your IRS tax return and give you your refund early, but not before subtracting their fees, which can be in the hundreds of dollars. However, there are no fees in waiting for your refund to arrive from the IRS.

Red flag: If a loan offers a shortcut, there may be a price to pay, such as fees to expedite your refund. 

4. Offers that seem “too good to be true”

If it seems too good to be true, chances are it is. Other businesses may offer a “credit repair” that promises to improve your credit score for a fee. In reality, the only way to restore your credit is through responsible use.

Red flag: Watch for “easy credit,” or ads that require you to call a ‘900’ number. It could be a scam.


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.

 

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