Why Payday Style Loans Are Not A Good Choice To Rebuild Bad Credit

Just this week The Cash Store Financial Services Inc. announced their new line of credit products in Ontario. In their words these products will ‘help build a credit history’.

Edmonton based Cash Store Financial, operating under the names “Cash Store Financial”, “Instaloans” and “The Title Store”, is offering the new product in place of it’s more traditional payday loan product. The company no longer offers payday loans in Manitoba and Ontario. They voluntarily gave up all of their payday lending licences in Manitoba and the Ontario Ministry of Consumer Services is seeking to revoke the licence of Cash Store Financial Services for several alleged violations of Ontario’s Payday Loans Act. Their new line of credit products fall under Federal legislation.

Should you use these new products to rebuild bad credit?

We recommend you do not and here’s why.

  • Payday loans are the worst kind of debt.  The combined fees and interest charges make them the most expensive form of borrowing around.
  • This new line of credit product will charge rates “appropriate to the credit risk associated with each line of credit advanced“.  Read this as very high, likely even higher than the highest department store credit card.
  • These new loans will have “regular minimum payments tailored to customers’ needs and profiles.”  In fact their website says you can “only pay interest on the amount borrowed”. Paying only the minimum payment, or worse interest only, on any form of debt is a bad idea and will keep you in debt for years.
  • Their website indicates that these new loans may be 90% repayable by your next pay day. In other words they are just another form of payday loan. If you keep renewing them you can expect even more fees.

A better way to rebuild you credit

  1. Make a list of your current debts with the highest interest rate debt at the top, then the second highest, and so on until you have all your debts listed.
  2. Make sure you make ALL the minimum repayments on all the debts so that no debt is in arrears.
  3. Put every extra cent you have towards the debt with the highest interest rate.
  4. Make payments towards you debts every week. If you have extra cash one week, pay off some debt before you are tempted to spend it.
  5. Once your first debt is paid off, move down the list.

Even if you have poor credit at the moment, this type of repayment plan will make you look like a good payer.  Paying your bills ON TIME is the number one way to improve your credit history. Reducing your debt load is the second. So you can rebuild your credit without applying for another loan.

Our recommendation is to stay away from payday loans or any form of high interest lending. It will cost you more and not necessarily rebuild your credit.

If you are caught in the payday loan cycle, contact an expert for advice today.

Category: Debt Management |

Feb 7, 2013

About Sharon Hoyes

Sharon Hoyes, CA, CPA is a Chartered Accountant and Managing Editor at MoneyProblems.ca writing about personal finance and consumer news and how it affects your debt.

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