High Cost Credit – Types To Avoid

It's sometimes easy to get credit but it can be hard to repay it. This is when the credit that seemed like a good option can end up costing you. Here are some examples of high cost credit.

Store cards

Store cards are offered in many retail outlets, over the public address system and at the checkout counter. It can be hard to say no, which is why so many Brits have store cards. But store cards are not an economical form of credit. In fact, they are one of the most expensive kinds.

Store cards are really credit cards. You spend money using the card and defer payment for a period. However, store card interest rates are much higher than those on normal credit cards. Interest rates for store cards hover around the 30% range, while some credit cards have interest rates as low as 8%. Even the credit cards that have rates above 20% are generally cheaper than store cards.

Store cards can become even more costly if you take out payment protection insurance and if you don't make payments on time. Late payment fees are steep and will rapidly increase the amount you owe.

Payday Loans

Payday loans are another expensive form of credit. Payday loans allow people to borrow a small sum, usually between £50 and £800 and repay it when they get paid. The loans are typically for short periods of two weeks to a month. There are no credit checks and people who are over 18 and can prove that their earnings have been paid into their bank for two or three months can have one.

Repayments are usually made by direct debit or by post-dated cheque and a steep fee is charged for the service. Some estimate that the interest rate on a payday loan could be well over 200%. It gets even more expensive if the loan is not repaid on time. Every extension of the loan means another steep fee. And if the loan is not repaid after a couple of extensions, the lender will find other ways of getting the money back.

Doorstep Loans

Doorstep lending is another type of finance that is often offered to those unable to get credit elsewhere. As the name suggests, lenders come round to your home to offer cash to meet your needs. They expect that you will repay this cash in weekly instalments. Doorstep loans have interest rates that vary between 40% and 170%, depending on the lender and people can find themselves with huge sums to pay back. In one case, a £5,000 loan turned into a debt of £300,000. If payments are late, doorstep lenders often resort to threats of violence to get their money back.

Doorstep lenders can be reported to the Department of Trade and Industry or the Office of Fair Trading, who may be able to prosecute. In cases where it can be proved that the borrower did not realise how much he or she was borrowing, the illegal lender could face a £5,000 fine and a two year prison term.

More Information:

• Payment Protection Cover For Your Credit Card - Is It Worth The Cost?
  Payment protection cover states quite clearly what it is but what are the ins and outs of the policy and is it worth considering taking out payment protection cover on your credit card.
• Credit Card Charges
  Credit cards appear to have only one cost to a user – the interest charged on purchases, but there are a whole raft of hidden charges just lurking below the surface. So, some cards offer an annual payment option in return for certain benefits. What is the best option, and in what circumstance
• The Pros And Cons Of Payment Protection Insurance
  Lenders are always eager to convince borrowers to protect their repayments for loans, credit cards, store cards, mortgages and other financial products. And they have a point. People in the UK are saving less and borrowing more, with a high rate of debt.
• Flashing The Cash
  Loans have been a part of domestic finance for several centuries and lenders keep coming up with new ways to lend money to borrowers. One method that is beginning to catch on is the cash advance loan. This is also called a payday loan or cheque advance loan and there are many other terms to describe it.