Credit traps: How they work, and how to beat them

Many stores make most of their profits by getting you to spend money you don't have yet. You buy on credit; in other words, you pay extra to get a loan from the store. That extra amount is called "interest."
Of course, if you borrow more than you can pay back, the store charges extra penalties, additional interest, and may take back the item you purchased.

The store charges "interest," a percentage of the loan. The more interest you have to pay, the more money the store makes.
To find out how much interest you will have to pay, check the Annual Percentage Rate, or APR. "Percent" means "per 100." If you borrow at 9% interest, you must pay back an extra $9 per $100. At 28% interest, you must pay back an extra $28 per $100.

Look for the APR before signing any credit agreement. This tells you how much the loan will cost you each year.
Always ask what will happen if you miss a payment, and if you do not pay off the entire amount on time.
Shop around. Use the Yellow Pages to check whether another store has a lower price or a fairer deal.
Instead of buying on credit, save the money in advance, and pay cash.
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"Zero percent down and no interest for 90 days!". . . "Buy now and pay nothing until next year!" These deals sound great, but in the long run they cost you a lot more money.
Retail stores love to use this "buy now, pay later" strategy. Often they will issue you a store credit card and try to get you to buy "credit insurance."

Although you don't have to pay anything for a while, the store still charges interest, so the cost of the purchase keeps increasing. In the long run you pay much more.
Sometimes the store does require interest payments up front, but claims it will "rebate" the interest to you after the last payment is made.

Don't wait to pay off a debt. The longer you wait, the more it will cost you.
Look for the APR. Always ask questions. Shop around for the best deal.
If interest will be "rebated," ask what happens to the rebate if you are late with a payment.
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Instead of paying for an expensive item such as a TV, you pay a weekly or monthly rent. When you have rented the item for a certain amount of time, it becomes yours.
The "rent-to-own" industry is dominated by corporations, who make $4.5 billion a year by targeting the working class and the elderly.

Because the store is "renting" instead of selling, the store does not have to report how much it is charging in interest.
If you are late with a payment, there is no legal limit to how much interest the store can charge in "finance charges."

Don't use "rent-to-own" plans. They will cost you between two times and five times as much as a cash purchase.
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Pawn shops have been around since the Middle Ages. You give a valuable item to the shop in order to secure a loan with a high interest rate. If you pay off the loan and the high interest payments, your "pawned" item is returned to you. If you don't make the payments, the shop keeps your pawned item and sells it.
Pawn shops are not just local "loan sharks" anymore. They are often controlled by overseas corporations and/or financed by "respectable" banks such as NationsBank. The Cash America pawn shop corporation has hundreds of shops in the USA, Britain and Sweden, and is traded on the New York Stock Exchange.

A new technique is for pawn shops to get customers to exchange their car title for cash, resulting in loss of the car if the customer cannot pay back the high-interest loan. Some new pawn shops have opened especially to enter the "Pawn Your Title" business.

Interest rates on pawn shop loans may be 200% or more. Pawning your car title is likely to result in the loss of your car. Look for another way to secure a loan.
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These companies offer car loans, home mortgages, and other loans to people who are turned down by banks.
Finance companies are often owned by the same banks that reject poor and working-class customers. Citibank, NationsBank, Ford, Western Union and others take in up to $300 billion a year through high-interest finance.

These companies charge higher interest rates for the same services that banks and mortgage lenders provide to wealthier customers. They depend on their customers' being unaware that they have other, less expensive options.

Shop around. Go outside your neighborhood when looking for a car loan or mortgage.
If you are trying to buy a home, look into federal programs that give financial help to home buyers.
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