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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

InDepth Look at Payday Loans (Quick Cash Advances)

i) What is a Payday Loan?

A quick cash advance (also known as a payday loan) is a short-term loan borrowed that will help you cover your short term cash flow problems while you wait for your paycheck at the end of the month. Payday loans come in denominations of $100, $200, $500, $1000 or $1500. Most payday loans available go up to a limit of $1500 in USA.

If you borrow a payday loan, you promise to pay it back from your next paycheck. This next paycheck must be within 2 weeks and the total amount you can borrow is limited to 30% of the total net amount of your paycheck. For instance, if you earn $1200 every 2 weeks, then the maximum amount of payday loan you can borrow is $1200 x 30% = $360.

Since payday loan companies are not regulated by the government, they charge enormous amounts of fees & interest charges that most people do not realize. Payday loans are thus very expensive means of borrowing money.

ii) How Does a Payday Loan Work?

You go into a payday loan shop and ask to receive some $$. They'll be like "sure!" In order for payday loan lenders to lend you money, they will require a few things off you:

  • Proof that you have a steady job or steady monthly income
  • Have a permanent residential address
  • Active bank account
  • Be over the age of 18

To lend you the payday loan, the lender will ask for a post-dated check or authorization of a direct withdrawal from your checkings/savings account of the original principal amount that you borrow + any fees + interest charges. The amount of fees that you will pay within this 2 week period is what makes payday loans so expensive to borrow.

After you step into the payday loan shop and ask for a loan, the lender will ask you to sign an agreement, detailing the terms and conditions of the loan. Some of the terms of the agreement will include:

  • The total amount of the loan and the date it must be repaid

  • Any upfront fees, charges and first-time borrower fees added to the original principal

  • Any other fees and charges that you will pay

  • Payment options available to you (electronic or paper check, wire transfer, etc)

  • Any late fee charges

iii) How do I Repay Back a Payday Loan and When??

The official date at which you will have to pay back the payday loan will be stated on the agreement that you sign. This amount includes the original principal amount + any upfront charges + first time borrower fees + interest charges. The lender will cash in the post-dated check that you presented to the lender when you borrowed the loan on the date of maturity. This way, the amount of the loan will be debited from your checking/savings account automatically by the banks.
Note: Some lenders require that you pay the loan amount in cash. Check with your payday loan lender to see exactly how they want to get paid.

iv) How Does a Payday Loan Affect my Credit Report?

If you make your credit card payments on time, this will be reflected on your credit report and you will have a good credit score. This is because credit card companies work in conjunction with credit report bureaus to assign you a credit score. Therefore if you make any late payments, this will negatively impact your credit score.

Since payday loan companies are not among the members of credit reporting agencies, any on-time payments you make towards a payday loan does not positively reflect your credit score. Infact, the credit reporting agency won't even know that you have borrowed a payday loan. Note however that if you make any late payments towards a payday loan, the lender will report you to the credit reporting bureaus (and collection agencies) and this could negatively impact your credit score.

Similar to credit reporting bureaus, there is a new service called TeleTrack Canada that tracks any payday loans you borrow, any rent-to-buy services you acquire or any consumer finance companies that you work with (for example credit counseling firms). Your information is then entered into a database administered and maintained by TeleTrack Canada. Payday loan companies have access to the database records of TeleTrack Canada and can therefore check these records before lending you a payday loan.