Loans & credit

Building good credit is extremely important as you establish your identity as a consumer. Borrowing money can be a smart thing to do if you borrow an amount you know you can repay on schedule.

To establish a good credit history, you will probably have to either secure a loan or find someone to co-sign for you. You can secure a loan by depositing money in a bank and then borrowing against it. If you had the money, why would you deposit and borrow? To establish that you are responsible enough to make regular payments.

Unless you offer security or find someone to co-sign, loans are pretty hard to find when you have no credit history. But you should know that loan scams are everywhere. If you need to borrow money, the last thing you need is to lose money to a scam artist.

Loan scams

It's called "predatory lending." Predatory lenders take advantage of people desperate for cash. They may outright steal what little money you have, or they may saddle you with terms and interest that will break you and ruin your credit for years to come.

"Guaranteed" and "Don't worry about your bad credit" are classic bait for unsuspecting or desperate consumers. A red flag: no legitimate lending institution guarantees in advance that a loan will be approved. First you have to apply and pass a credit check.

No legitimate lender will charge you a fee of any kind before funding a loan. It is illegal for them to do so. Many consumers complain to us that they have scraped together the "fee" for a low-interest, easy-credit loan, only to find that they have been ripped off.

What can I do if I have bad credit?

Credit counseling is advice offered by a non-profit or for-profit organization that is designed to get you out of debt, often with the aid of a debt repayment plan. Typical debt repayment plans require you to make a monthly deposit to the credit counseling agency, which will then pay off your creditors according to a payment schedule set by your credit counselor. Be aware that participation in credit counseling will be noted on your credit record and may be held against you by would-be lenders.

Whatever you do, don't fall for credit a repair scam. Some scammers advertise that they can fix your credit for a fee. Be very suspicious of someone who says he can make your debts go away for any less than the amount you owe. He may be planning to pocket the "fee" and disappear.

Meet Pat V. In his own words: "I enrolled with an agency to pay my bills... Read the email

Pat wants to know if he will get his money back. Unfortunately, the answer is probably NO. Pat's money was probably squandered as fast as it was stolen.

When considering whether to use a credit counseling service, ask for an estimate of how long the repayment plan will take. The majority of successful plans require you to make regular payments for at least 48 months. Be sure to find out exactly how much money each service will cost you. Payment costs and requirements vary widely from agency to agency.

Payday loans and tax advances

You will see ads for payday loans (you pledge your next paycheck for an "advance") and for advances on income tax refunds. You will be paying just about the highest interest rate on the market. Does it matter? You bet.

Do yourself a favor:

• Learn how to calculate interest. Yes, it's a math problem, and you won't always like the answer. But if you don't figure it out, you will pay for it, big-time.
• Don't borrow unless you absolutely have to, and if you do, shop around for the lowest interest rate and best terms.
• Be realistic about your ability to make the payments. If you think NO credit is bad, wait til you try BAD credit.

One payday lender sued by Attorney General Abbott was charging fees and interest on short-term advances that added up to more than 700% interest. The cost of an unsecured, short-term loan can be ruinous.