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Posted by Tiffany Gaskin

Various Debt Traps and Warning Tips to Avoid Them

Various Debt Traps and Warning Tips to Avoid Them

Our community is filled with a series of products and services, which assure people of temporary relief from debt. While some of these products can provide relief, most of them are debt traps that will send users into a vicious circle of debt. 

Over time, such products can worsen one’s financial problem. As a result, here are some tips to keep in mind about debt traps and how to stay away:

  1. Bounce or Overdraft Protection

With bounce or overdraft protection, you can get payment for a check-up to a particular amount if the funds in the bank are not enough at the time. One can also take advantage of this with an ATM, even though it comes at a cost. 

The overdraft fee might be well above $35 for every incident for a bounced check, no matter the amount. For most programs, you might have to repay the entire cost alongside the overdraft amount in 30 days. You might have to make payment in 16 days or five days for some. Failure to pay on time can send the debt into collection.


  1. Refinancing of Mortgages 

Low rates are a temptation to refinance your loan. Since you believe that your monthly payment will reduce, leading to extra cash, however, it is not necessarily so because only a few people, those with the best credit, qualify. 

You might still have to consider costs alongside a couple of considerations if you qualify for a low rate. 

Ensure you get a comprehensive breakdown of the original fee alongside closing costs that comes with refinancing. Such costs might be between $1500 and $5000 for a single-family. 

Above all, your house is not meant to make you money. A 30-year mortgage should be paid off at retirement to reduce expenses when your income decreases. If you borrow from your home, your house will be poor.


  1. Payday Loans 

One of the most expensive forms of credit is a payday loan. For instance, you might write a personal check of, say, $240 to borrow $200 for two weeks. The lender will keep your check until the coming payday. The lender will deposit the check or extend it for another two weeks by paying another fee. In other words, assuming you postpone it thrice, you will be paying $120 to borrow $200. 

A payday loan is the most notorious debt trap out there—many times, such debt rolls into a second or third loan.


  1. Pawn Shop Loans 

If you find yourself in a financial bind, pawnshop loans can help as quick-fix and short-term loans. Properties usually secure them with terms of one to four months. 

The interest rate varies from 2% to 25% each month, with loan periods ranging from 30 to 60 days. Not paying at the agreed date might lead to the sale of the property.


  1. Home Equity Loan 

These are the riskiest loans that can negatively affect your financial health. Such loans are secured, and use your home as collateral. While you might get some financial relief immediately, missing any payment might be your doom as you could lose your home. Many shady lenders even want you to miss out on your payment so they can take your home.


A home equity loan is worse for people in a financial mess due to overspending. 

  1. Credit Repair 

Paying another person to repair your credit is like wasting your money as no one can do it for you but yourself. 

Check your credit report for errors and correct any mistakes by writing a letter detailing the error. 

There is no magic to improve your credit score but to pay your entire bills on time and ensure the minimum is paid. Any negative info on your credit score stays there forever if it is true. 

Consistent and on-time payment might be the only way to improve your credit score. Over 30% of your score hinges on your ability to pay on time. For people with bad payment history, ensure to start making payments on time, and the score will improve positively. 

Above all, get the proper education on tips to improve credit score with the correct credit behavior. 



Tiffany Gaskin
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