8 Tips To Avoid Being Victimized By Predatory Lending | Refresh Financial

8 Tips To Avoid Being Victimized By Predatory Lending

stopWhen the phrase, “predatory lending” is mentioned, what most people think of is payday loan companies. While these are definitely examples of predatory lending, they aren’t the only ones. Predatory lending can be done by lenders of all shapes and sizes and it happens often.

So what is predatory lending? According to Debt.org,

Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford.

If you’ve ever been offered a credit increase on one of your credit cards or lines of credit, and you’ve thought to yourself, "Can I really afford this?", chances are, you’ve been a victim of predatory lending.

So, how can you make sure you don’t become a victim of predatory lending? Here are eight pointers:

1. Do not take out new credit products if you’re already struggling with debt

It’s tempting, I know, to want to borrow more money to help you pay back the other money that you owe, but this is how the cycle of debt starts. Instead, work on your own self-discipline. Learn to live within your means, even if it means making drastic life changes, like moving or finding a better paying job.

2. Don’t apply for unsecured credit without an excellent credit score

It takes a lot of sacrifice and self-control to get up to a great credit score but once you do, the credit you will be extended from that point forward is going to come with much, much lower interest. You’re also going to know what it takes to have excellent credit, and be less likely to ruin what you’ve worked hard to earn.

3. Read and understand the terms you are agreeing to when applying for credit

Often, when we apply for a credit card, we see great introductory interest rates and up-front bonuses, and we miss the fact that after a certain honeymoon period, the interest rate skyrockets. Know what you’re getting into and how much it’s going to cost you. Don't forget to look at fees too!

4. Budget before you apply for credit

Determine what your total monthly income is after taxes, and take away your expenses. Is there room leftover for a new minimum payment every month? Even if you don’t intend on carrying a balance on this new credit source, prepare for the chance you might. Ensure you can afford another minimum payment.

5. Don’t accept increases in credit limits if you already struggle with debt

If you’re looking to bring your credit usage down, a safer way to do it is to pay off your debt as quickly as you possibly can. Accepting an increase to your credit limit will make your usage percentage better, but only so long as you squash any temptations to use it. If you already struggle with debt, you might ensure you’ve changed your habits before taking on more credit.

6. Pay your balances in full each month

When it comes to your revolving credit products, don’t let a balance accumulate if you can. Instead, pay them down to nothing and then pay them off each month in their entirety. This means you have to keep your spending to what you can afford and this is the absolute best way to avoid any credit traps.

7. Recognize that banks and lenders are a business and may not have your best interest at heart

While you may have been approved for a new source of credit, this does not mean it’s something you need. You need to be the ultimate decision-maker here. Just because a bank has seen fit to lend you money, doesn’t mean you should take it.

8. Avoid short term loans

Short term loans tend to come in the form of payday loans, which come with absolutely monstrous interest and fees. It’s easy to get drawn in by the idea of money in-hand right now, but the problem comes when you have to pay the loan back. Often, those looking for money in the form of payday loans cannot afford the fees that go along with it, or they’ll be completely tapped out when they pay it back in full, and so, they get talked into another loan to pay off the first. That’s how the spiral begins and it’s a trap some people never recover from. While the rules in Canada are slowly changing surrounding payday loans, avoiding them is still in your best interest.

If you’re struggling with debt and you want some way to boost your credit score without being at the mercy of predatory lenders, consider a credit building program instead. You don’t need any cash to secure the program up front, and at the end of it, you end up with a chunk of change you can use to bring your other balances down. Plus, it reports to the credit bureaus, just as a loan does. Click here for more information.

Have you ever felt drawn into a predatory lending trap? Tell us about it in the comments.

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