What is a Payday Loan?

A payday loan, which might also be called a “cash advance loan” or “check advance loan” is a short-term loan for a small amount, usually ranging from $100 to $1,500. Typically people take out these loans to fund expenses that are due and need to be paid off before their next paycheck arrives. In that situation, people borrow just enough money to get through to their next payday, which is when the loan is due.

Payday loan businesses may take postdated checks as their collateral in case you are unable to pay back what you borrowed. This means that the borrowers need to write a post-dated personal check in the amount they want to borrow, in addition to a fee for borrowing the cash. The lender immediately advances the customer funds, but holds onto the check and cashes it on the agreed upon date, which is usually on the borrower’s next payday.

Is a payday loan for you?

Most borrowers using payday loans have bad credit and low incomes. Many don’t have access to credit cards and take out these loans to avoid costly bounced checks, overdraft protection fees, and late bill payment penalties.

You can get this type of loan from a business that is not a bank, usually from a loan store. Generally these businesses charge a large fee for the loan, making the interest rate on the loan very high. The cost of the loan may range from $10 to $30 for every $100 borrowed. If the fee was $18 per $100 for seven days, this is equivalent to a rate of more than 900% on an annualized basis. By comparison, APRs on credit cards can range from about 12% – 30%.

Since payday loans charge a very high interest rate, it is advisable to see if you have other alternatives before taking out a payday loan. Increase your income by finding another job or cut down unnecessary expenses to free up your cash.

Read here on how to get a payday loan.

The Importance of a Credit Score

Need to apply for a mortgage, auto or a personal loan? Whenever you apply for credit, lenders will check your credit score to see if you qualify for a loan. But what exactly is a credit score and why is it so important?

A credit score is a three-digit number that is a strong indicator of how likely you are to pay back the debt you owe, based on your past borrowing behavior. A higher credit score shows lenders that you are more likely to pay back the money you borrow. Likewise, a lower credit score signals a higher possibility that you may default on your loan. Although many people think that a credit score only matters in terms of whether or not you get approved for a loan, its importance actually goes beyond that. Your credit score can have a significant impact on other areas in your life.

Loans

A credit score is used to determine whether you get approved to borrow money to finance a house or car, your college tuition, or even to start up your own business. In addition, it is also used to determine how much credit you qualify for and what the interest rate of your loan will be. This means that if you have a higher credit score, you will be rewarded with lower interest rates, thus saving you a lot of money in fees.

Having a Low Credit Score

Most of us already know that if you have a low credit score, it is difficult to find a bank or credit card company to lend you money. But unfortunately, having a low credit score doesn’t just stop there. Not only does your score affect whether or not you can borrow money at a low interest rate, but it impacts other areas, such has insurance rates and employment opportunities.

Insurance Rates

Your credit score will likely play a role in determining your premium when you apply for auto or homeowners insurance. A low credit score can cost you hundreds of dollars in additional premiums each year.

Employment

Sometimes employers check your credit history because they believe that it is an indicator of how responsible you are. Many jobs that deal with money on a daily basis require applicants to be responsible in handling cash.

Rent

Many landlords do a credit check on potential tenants. Having a low credit score may indicate to the landlord that you might have trouble paying the rent on time.

Your credit score and history is one of the most vital parts of your financial life. Even if you have a high income, if your credit score is low, you may still be denied for lines of credit. Lenders want to minimize the risk that borrowers will default on their financial obligations. If you have bad credit, it is not the end of the world. By doing your research, you can learn about the factors that impact your credit score and implement ways to improve your credit score.

Prepaid Debit and Credit Cards

What is the difference between prepaid debit cards and prepaid credit cards?

Prepaid credit cards, also known as secured credit cards, allow you to use credit in exchange for a certain amount of money that you give to the credit card issuer to hold in a savings account. Unlike a prepaid debit card, a prepaid credit card makes purchases on credit, which must then be repaid using funds from another account. Every time you make a purchase, you promise to pay the credit card with funds not drawn from the savings account. The money held by the credit card issuer acts as collateral in case you are unable to pay off your balance.

A prepaid debit card functions similar to a bank debit card or gift card. There has to be enough funds attached to the card before you can make a purchase. Every time you make a purchase, the funds on the debit card is reduced by the amount of the purchase. Once all the money on your debit card is used up, you can no longer make purchases unless you recharge it.

With a prepaid debit card, the limits on your spending are directly based on the amount of money you add to the card. This is not the case with a prepaid credit card. Your prepaid credit card will usually have a credit limit and you can only make purchases each month up to your limit. Although some cards will allow you to go over your credit, fees will be charged.

Prepaid credit cards are often used as a way of building good credit, especially if you have a bad credit history. Prepaid credit cards report every month to the credit bureaus. Making regular small charges and paying them off every month will show that you are financially responsible, which can help increase your credit score. However, if you do not know how to handle credit, you can still end up in trouble, as it can charge interest rates anywhere from 15% to 23%. With prepaid debit cards, since you can only spend money you actually have, you won’t have to worry about being in debt.

A prepaid credit card offers protection if your credit card is stolen. The federal law limits your liability for any unauthorized transactions. When you lose your prepaid debit card, it’s like losing cash and you cannot get it back. However, a prepaid debit card is better than the standard debit card because since your prepaid debit card isn’t directly connected to your bank account, you do not have the risk of having your bank account drained.

One of the most important things to consider when deciding between a prepaid credit card and a prepaid debit card is that only a prepaid credit card has the ability to improve your credit score.  Prepaid debit cards do not show anything about your borrowing or repaying behavior, and thus have no impact to your credit score. Read more about factors that affect your credit rating.