Steer Clear Of These 3 "Bad Credit" Options

Everyone reaches a point financially where they need a little help. There are some places in which the assistance can be very helpful and other places where it isn't. It is best to know what isn't so you can avoid the consequences down the road that could negatively impact your financial well-being.

Whether interest rates on consumer credit cards designed for individuals with bad credit are considered too high depends on a person's perspective. When used wisely, credit cards serve as a valuable tool in rebuilding a bad credit score. If you are one of those individuals with bad credit, there are a number of options out there, but some of those options can be rather scary.

These frightening bad credit options involve payday loans, debt settlement services, and cash advances. While these things may seem like a good idea when in a bind, they can have some rather costly consequences that can throw you into a deeper financial hole than you may have been in to begin with.

Payday Loans

The payday loan is an unsecured loan that is designed to provide a person with the cash they need for a short period of time. These loans are usually for less than $1,000 and they are to be repaid in full when the borrower receives their next paycheck.

In order to ensure that the loan is paid back, the borrower has to postdate a cheque and give it to the lender. On the day that the borrower is scheduled to be paid, the lender will cash the cheque. The amount of the cheque includes the loan amount and the associated fees, so the cheque is going to be written for an amount higher than what was borrowed.

The fees that are involved include a number of expenses, such as registration fees. The charges are added onto the maximum legal interest rate. The Canadian criminal code specifies that the maximum legal interest rate is 60 percent. If you wish to refinance your postdated cheque in order to extend the borrowing period, which is something that a lot of Canadians do, then more fees will be applied to the loan.

In 2007, the University of Manitoba did an insolvency study in which they found the average annualized rate for a payday loan can be as high as 650 percent. This is why it is suggested that consumers avoid payday loans because they are the most expensive consumer credit source next to loan sharking.

Debt Settlement

You've probably see commercials, newspaper ads, and online ads about debt settlement services. What this refers to is negotiating your debts with your creditors with the goal of repaying only a fraction of the amount that is owed.

It is important to be careful because some debt settlement agencies tend to make claims that are misleading. Some may even engage in fraudulent acts in order to make a profit off of those needing financial solutions.

The truth is that debt settlement services have no guarantees. It is imperative that you understand that creditors will not typically accept an amount less than what is owed without carefully examining the financial situation as a whole. It may turn out that owning a house and a car when seeking debt settlement could result in you eventually having to sell those assets in order to settle all or part of a debt.

Debt settlement companies can also impose high fees up front. Whether your debts are settled or not, you may still find yourself having to pay those fees. It is recommended that you consult with your bank, creditors, and any reputable professionals in order to find credit solutions that harbor less risk.

Cash Advances

Cash advances mean making withdrawals from automated banking machines and bank branches with credit cards. Credit card convenience cheques are considered cash advances as well. Unfortunately, this is a very costly option. There are fees and interest charges that are instantly charged when cash is withdrawn or a convenience cheque is deposited. It is important to note that cash advance charges can surpass 500 percent. The transaction fees alone can range from 2 to 4 percent of the cash advance amount.

Because the standard across the industry is to apply payments to the low-rate balances first, the high-interest cash advance charges can hang around on the account for many years. It is ideal to only use a credit card to buy items that can be paid for in full within the billing cycle.

Using Credit Cards Responsibly

Payday loans, debt settlement services, and cash advances may seem like great quick fixes for those in a financial bind. The reality is that those types of fixes are rather scary and can cause the downward debt spiral to accelerate. In other words, the financial problems become much more serious.

The way to financial success, especially when rebuilding credit, is to set a monthly budget that is very strict and stick to it. You must be committed to reducing your spending and pay your bills on-time. To ensure you do this, you can use your credit card for emergencies only until your budget allows you to spend a little more. This is a road that takes time to navigate, but spending responsibly and having good payment habits can help you in a number of ways. That way when a financial bind does present itself, you have more reputable options open to you rather than the bad credit options that can push you even further down the road to irreversible debt. To better keep track of your budget, you can use an online budget calculator that can help you maintain your income and expenses.


Being in a financial dilemma can be confusing and difficult to deal with. The panic can lead to financial decisions that can have poor long-term consequences. While payday loans, cash advances, and debt settlement may not be the best solution, there are others out there that can help you get on track.

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