Why Improving Your Credit Score May Be a Wise Resolution for 2014
To many, it may appear that Americans are as addicted to credit as they are to their favorite latte, and the lending and credit industry has reaped the benefits, especially from those who have less-than-a-great credit score. One aspect of this fact appears to be changing based upon a recent announcement by federal regulators.
The announcement basically states that authorities who regulate the banking industry will be closely scrutinizing short-term loans, commonly referred to as "pay day loans".
In November of 2013, the Office of the Comptroller of the Currency along with the Federal Deposit Insurance Corporation (FDIC) issued a statement directed at banks that offer these types of loans. This statement advised that these lending practices were going to be closely scrutinized to ensure that the borrowers' ability to repay, usually measured by credit score, was taken into consideration when executing the loans. Large banks in the US, including Wells Fargo, US Bank and Regions, are responding to the news by halting their offerings of such loans, many as soon as within the next few weeks.
What Makes a Pay Day Loan Predatory?In a nutshell, a predatory loan is defined as one that exploits the inability to repay by the borrower. Pay day loans are popular among the nation's working class who literally live from paycheck to paycheck. Many of these people have a less-than-optimal credit score which makes it difficult for them to obtain short-term credit elsewhere, such as with a credit card.
These consumers often find themselves running short on cash in the few days before their next paycheck and may need such necessities as groceries or even gas for their cars in order to drive to work. By taking a short-term pay day loan, these individuals can obtain the cash they need. The terms of these loans usually require that the individuals' pay checks must be on direct deposit with the lending institution, and when the workers' wages are deposited, the bank immediately withdraws its repayment for the loan.
It sounds like a win-win proposition for all parties to the loan until you look further into the terms and conditions of these loans. The average lending period for these loans is approximately 10 days and the average fee is $10 per $100 loaned. It sounds nominal on the surface, but when you calculate the APR on a loan such as this, it comes to a jaw-dropping 365%! In fact, consumers are all-too-often unable to repay these loans when pay day does come around, and find themselves needing to renew the loans regularly and falling deeper into debt that they cannot repay.
What Can the Consumer Do?While banks are responding by halting their pay day loan practices, there are also steps that consumers can take to avoid falling into the pay day loan trap and improving their own financial positions. If you are one of these consumers who struggle with your own personal cash flow, consider taking the following proactive steps on your own behalf:
- Obtain a copy of your credit report that includes your credit score. If you need help interpreting the report, solicit the assistance of a financial expert such as your banker.
- Prepare a household budget that is reasonable and achievable. Identify where your cash is going and plug the leaks. Brown bag your lunches instead of buying your lunch each day. Forego the latte and carry your coffee in your own travel mug each day. You may save as much as $100-$300 monthly.
- When preparing the household budget, figure a few extra payments to the creditors who are reporting adverse items on your credit report. Even if the items have been placed for collection, your credit score looks better if they are paid.
- Consider taking on an additional part-time job and pledge that all earnings from it go to retiring existing personal debt.
The bottom line is that financial success has less to do with the amount of money you make, and more to do with the manner in which you handle the money you do make. It is a matter of basic mathematics. If more goes out than what comes in, a deficit results and your credit score suffers.