Your Debt To Income Ratio

Source : http://www.creditorweb.com/ permits to republish here.


To stay out of debt, you must spend less money than you earn. 
Implementing this financial plan is often more difficult than it would
seem. Your debt to income ratio is an important part of your overall
credit history.  If you spend more money than you earn, your debt
to income ratio will be high, making it hard to finance a home or make
major purchases.  There are two basic factors are used in
calculating your debt to income ratio - your net worth and your total
debt.   There are standard guidelines used in the credit
industry to determine if your debt to income ratio is too high. 
The standard may be a bit low due to the fact that many have an
acceptable debt to income ratio but still struggle to pay monthly
expenses.

Your total net worth includes your monthly net pay, overtime and
bonuses, and any other annual income.  Your total debt includes
your mortgage, other loan payments or revolving accounts, car payment,
credit cards, and any child support you pay.  If you divide you
total monthly debt payments by your monthly income, you have your debt
to income ratio.  In the eyes of a creditor, if your debt to
income ratio is lower than 36% you are in good financial shape. 
However, your personal situation, your unique expenses, and your number
of dependants will determine how much debt you can reasonably pay each
month.  If your debt to income ratio is less than 30 percent, you
are in excellent financial condition; 30-36% - you will have no trouble
with lenders, but should work to bring this number down to 30 or less;
36-40% - you will most likely be able to get a loan, but you may have
trouble meeting your monthly obligations; 40 percent or higher - you
will need to evaluate your finances and work towards eliminating debts.

Your credit card debt plays a major role in determining your debt to
income ratio.  The amount you owe on your credit cards has a
direct bearing on your credit score.  If your debt exceeds your
income, your credit score will drop.  Many factors go into
determining your credit score, all of which are indicators of your
overall financial health.  Lowering credit card debt is one of the
best ways to improve your credit score and your debt to income
ratio.  The average American has over $8000 in credit card
debt.  If you are paying the minimum payments each month, this
still takes a big bite out of your income.  Even if your credit
history is excellent, with very few or no late payments, if you have
too much debt, you could be denied a loan. 


Take control of your credit score by lowering your credit card debt or
eliminating it all together.  Your credit score will rise and you
will lower your debt to income ratio.  If you plan to apply for a
loan, purchase a new home, or want to buy a new car, you must make sure
your level of debt does not exceed more than 36% of your income. 
In addition, if you have several credit cards with very low or zero
balances, you would benefit by closing those accounts and transferring
any outstanding balances to a credit card with a low interest
rate.  Some lenders will calculate your debt to income ratio based
on the amount of credit that is available to you.  If you have
several dependants, you may want to lower your debt to income ratio to
around 20% to ensure that you can pay your monthly debt comfortably.

This article is courtesy of CreditorWeb.com, where you can compare business credit card offers and apply for credit cards online.


Click ref : Credit Score --- Credit Repair --- Payday Loan/Mortgage/Grants

Credit History / Report - Wikipedia

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Souce : Wikipedia permits to republish here at based on restrictions Creative Commons Attribution-ShareAlike License  and http://creativecommons.org/licenses/by-sa/3.0/ Contents in wikipedia is frequently revised and I endeaver to put in the latest version here.
But I suggest you visit them frequently just in case.

<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

 From Wikipedia, the free encyclopedia
Jump to: navigation, search

This article deals with the general concept of the term credit history. For detailed information about the same topic in the United States, see Credit score (United States).

Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term "credit reputation" can either be used synonymous to credit history or to credit score.


In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files.That's why it's very important for creditors, lenders and others to provide accurate data to credit bureaus. ^[1]


This information is used by lenders such as credit card companies to determine an individual's credit worthiness; that is, determining an individual's willingness to repay a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid on a monthly basis.


There has been much discussion over the accuracy of the data in consumer reports. However, the only scientifically researched studies that include sample sizes large enough to be valid have generally concluded the data in credit reports is very accurate. ^{[2] [3]} The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error.^[4]


If a consumer disputes some information in a credit report, the credit bureau has 30 days to verify the data. Over 70 percent of these consumer disputes are resolved within 14 days and then the consumer is notified of the resolution.^[4] The Federal Trade Commission states that one large credit bureau notes 95 percent of those who dispute an item seem satisfied with the outcome.^[5]


The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history.


These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk-based pricing on almost all lending in the financial services industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate (APR), grace period and other contractual obligations of the credit card or loan.

Contents [hide] 1 Calculating a credit rating 2 Acquiring and understanding credit reports and scores 3 Credit history of immigrants 4 Adverse credit 5 Consequences 6 More than One Credit History Per Person 7 See also 8 References

Calculating a credit rating

Credit ratings vary from scoring model to scoring model, but in general the FICO scoring system is the standard in U.S., Canada and other global areas. The factors are similar and may include:

• Payment history (35% contribution on the FICO scale) - A record of negative information can lower a consumer's credit rating or score. In general risk scoring systems look for any of the following negative events; charge offs, collections, late payments, repossessions, foreclosures, settlements, bankruptcies, liens, and judgements. Within this category FICO considers the severity of the negative item, the age of the negative items and the prevalence of negative items. Newer is worse than older. More severe is worse than less severe. And, many is worse than few.
• Debt (30% contribution on the FICO score) - This category considers the amount and type of debt carried by a consumer as reflected on their credit reports. There are three types of debt considered.

• Revolving debt - This is credit card debt, retail card debt and some petroleum cards. And while home equity lines of credit have revolving terms the bulk of debt considered is true unsecured revolving debt incurred on plastic. The most important measurement from this category is called "Revolving Utilization", which is the relationship between the consumer's aggregate credit card balances and the available credit card limits, also called "open to buy." This is expressed as a percentage and is calculated by dividing the aggregate credit card balances by the aggregate credit limits and multiplying the result by 100, thus yielding the utilization percentage. The higher that percentage the lower your score will likely be. This is why closing credit cards is generally not a good idea for someone trying to improve their credit scores. Closing one or more credit card accounts will reduce your total available credit limits and likely increase the utilization percentage unless the cardholder reduces their balances at the same pace.
• Installment debt - This is debt where there is a fixed payment for a fixed period of time. An auto loan is a good example as you're generally making the same payment for 36, 48, or 60 months. While installment debt is considered in risk scoring systems it is a distant second in its important behind the revolving credit card debt. Installment debt is generally secured by an asset like a car, home, or boat. As such, consumers will use extraordinary efforts to make their payments so their asset isn't repossessed by the lender for non-payment.
• Open debt - This is the least common type of debt. This is debt that must be paid in full each month. An example is any one of the variety of credit cards that are "pay in full" products. The American Express Green card is a common example. Open debt is treated like revolving credit card debt in older version of the FICO scoring system but is excluded from the revolving utilization calculation in newer versions.

• Time in file (Credit File Age) (15% contribution on the FICO scale) - The older your credit report the more stable it is, in general. As such, your score should benefit from an old credit report. This "age" is determined two ways; the age of your credit file and the average age of the accounts on your credit file. The age of your credit file is determined by the oldest account's "date opened", which sets the age of the credit file. The average age is set by averaging the age of every account on the credit report, whether open or closed.
• Account Diversity (10% contribution on the FICO scale) - Your credit score will benefit by having a diverse set of account types on your credit file. Having experience across multiple account types (installment, revolving, auto, mortgage, cards, etc) is generally a good thing for your scores because you're proving the ability to manage different account types.
• The Search for New Credit (Credit inquiries) (10% contribution on the FICO scale) – An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. Inquiries that have no effect on the creditworthiness of a consumer (also known as "soft inquiries"), which remain on your credit reports for 6 months and are never visible to lenders or credit scoring models, are:
  • Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.
  • A creditor also checks its customers' credit files periodically. This is referred to as Account Management, Account Maintenance or Account Review.
  • A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.
  • A consumer can check his or her own credit report without impacting creditworthiness. This is referred to as a "consumer disclosure" inquiry.
  • Employment screening inquiries
  • Insurance related inquiries
  • Utility related inquiries
• Inquiries that can have an effect on the creditworthiness of a consumer, and are visible to lenders and credit scoring models, (also known as "hard inquiries") are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries can, but don't always, affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.

• 35% - Payment History: Negative information.
• 30% - Debt: How much and what type?
• 15% - Length Of Credit History: This is how long you've had credit
• 10% - Credit Diversity: This is the different types of credit experience you've had
• 10% - Inquiries (hard): This is when a creditor checks your credit report

Acquiring and understanding credit reports and scores

There are many businesses that aim to make money by providing services to consumers to check their credit reports and confirm the information in them. These companies advertise heavily. In the US, the Fair Credit Reporting Act and its amendments require that any national consumer credit reporting agency (including Experian, Equifax, and TransUnion) and any national specialty consumer reporting agency (including Innovis, PRBC, Teletrack) provide a free copy of the credit reports for any consumer who requests it, once per year. Free annual credit reports for Experian, Equifax and TransUnion may be requested at https://www.annualcreditreport.com. Note that many imposter websites with names similar to www.annualcreditreport.com exist, and users will see promotions for extra credit-checking services that cost money. Carefully following the process and declining for-pay services will allow users to get their free annual credit reports. Also note that the free reports do not include the consumer's credit score. Rather, they provide a list of accounts so users can confirm that no erroneous information is on the reports.


Information from the GSA Federal Citizen Information Center (US government) is available for free download in .pdf form at http://www.pueblo.gsa.gov. Look for the pamphlets "Building a Better Credit Report" and "Your Credit Scores."


Free information about understanding one's credit report and credit score is also available from MoneyWi$e, a non-profit partnership between Consumer Action and Capital One, at http://www.money-wise.org.


The government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online through http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.

Credit history of immigrants

Credit history usually applies to only one country. Even within the same credit card network, information is not shared between different countries. For example, if a person has been living in Canada for many years and then moves to the United States, when they apply for credit cards or a mortgage in the U.S., they would usually not be approved because of a lack of credit history, even if they had an excellent credit rating in their home country and even if they had a very high salary in their home country.


An immigrant must establish a credit history from scratch in the new country. Therefore, it is usually very difficult for immigrants to obtain credit cards and mortgages until after they have worked in the new country with a stable income for several years.


Some credit card companies (e.g. American Express) can transfer credit cards from one country to another and this way help starting a credit history.

Adverse credit

Adverse credit history, also called sub-prime credit history, non-status credit history, impaired credit history, poor credit history, and bad credit history, is a negative credit rating.


A negative credit rating is often considered undesirable to lenders and other extenders of credit for the purposes of loaning money or capital.^[6]


In the U.S., a consumer's credit history is compiled by consumer reporting agencies or credit bureaus. The data reported to these agencies are primarily provided to them by creditors and includes detailed records of the relationship a person has with the lender. Detailed account information, including payment history, credit limits, high and low balances, and any aggressive actions taken to recover overdue debts, are all reported regularly (usually monthly). This information is reviewed by a lender to determine whether to approve a loan and on what terms.


As credit became more popular, it became more difficult for lenders to evaluate and approve credit card and loan applications in a timely and efficient manner. To address this issue, credit scoring was adopted.^{[citation needed]}A benefit of scoring was that it made credit available to more consumers and at less cost.^[7]


Credit scoring is the process of using a proprietary mathematical algorithm to create a numerical value that describes an applicant's overall creditworthiness. Scores, frequently based on numbers (ranging from 300–850 for consumers in the United States), statistically analyze a credit history, in comparison to other debtors, and gauge the magnitude of financial risk. Since lending money to a person or company is a risk, credit scoring offers a standardized way for lenders to assess that risk rapidly and "without prejudice."^{[citation needed]} All credit bureaus also offer credit scoring as a supplemental service.


Credit scores assess the likelihood that a borrower will repay a loan or other credit obligation. The higher the score, the better the credit history and the higher the probability that the loan will be repaid on time. When creditors report an excessive number of late payments, or trouble with collecting payments, the score suffers. Similarly, when adverse judgments and collection agency activity are reported, the score decreases even more. Repeated delinquencies or public record entries can lower the score and trigger what is called a negative credit rating or adverse credit history.


Your credit score is a number calculated from factors such as the amount of credit outstanding versus how much you owe, your past ability to pay all your bills on time, how long you've had credit, types of credit used and number of inquiries. The three major consumer reporting agencies, Equifax, Experian and TransUnion all sell credit scores to lenders. Fair Isaac is one of the major developers of credit scores used by these consumer reporting agencies. The complete way in which your FICO score is calculated is complex. One of the factors in your Fico score is credit checks on your credit history. When a lender requests a credit score, it can cause a small drop in the credit score.^[8][9] That is because, as stated above, a number of inquiries over a relatively short period of time can indicate the consumer is in a financially difficult situation.

Consequences

The information in a credit report is sold by credit agencies to organizations that are considering whether to offer credit to individuals or companies. It is also available to other entities with a "permissible purpose", as defined by the Fair Credit Reporting Act. The consequence of a negative credit rating is typically a reduction in the likelihood that a lender will approve an application for credit under favorable terms, if at all. Interest rates on loans are significantly affected by credit history; the higher the credit rating, lower the interest while the lower the credit rating, the higher the interest. The increased interest is used to offset the higher rate of default within the low credit rating group of individuals.


In the United States insurance, housing, and employment can be denied based on a negative credit rating.


Note that it is not the credit reporting agencies that decide whether a credit history is "adverse." It is the individual lender or creditor which makes that decision, each lender has its own policy on what scores fall within their guidelines. The specific scores that fall within a lender's guidelines are most often NOT disclosed to the applicant due to competitive reasons. In the United States, a creditor is required to give the reasons for denying credit to an applicant immediately and must also provide the name and address of the credit reporting agency who provided data that was used to make the decision.

More than One Credit History Per Person

In some countries, people can have more than one credit history. For example, in Canada, although most Canadians are not aware of it, every person who applied for credit before obtaining a Social Insurance Number has two separate credit histories, one with SIN and one without SIN. This is due to the credit reporting structure in Canada. This can lead to two completely separate parallel histories, and often leads to inconsistencies (although typically the person in question will never notice the inconsistencies), because when a lender asks for someone's credit report with SIN, what the lender gets is different from what he would have gotten if he asked the report without providing the SIN. This is because, contrary to popular belief, when someone gets a new SIN for whatever reason, the two credit files are never merged unless the person requests specifically. As a result, a record with SIN zeroed out is kept separately from a record with SIN. Note this happens without the person even knowing it.^{[citation needed]}

See also

• Alternative data
• Comparison of free credit report websites
• Credit bureau
• Credit card
• Credit rating agency
• Credit reference agency
• Credit score
• Identity theft
• Fair Credit Reporting Act
• Fair and Accurate Credit Transactions Act
• Fair Debt Collection Practices Act
• Office of Fair Trading
• Remortgage
• Seasoned trade lines

References

1. ^ http://www.washingtontimes.com/news/2009/jan/19/credit-agencies-are-the-messengers/
2. ^ Credit Report Accuracy and Access to Credit. Federal Reserve Bulletin. Summer 2004
3. ^ Allstate Insurance Company’s Additional Written Testimony: Allstate’s Use of Insurance Scoring. 23 Jul 2002.
4. ^ ^{a b} Prepared Statement of the Federal Trade Commission on Credit Reports: Consumers' Ability to Dispute and Change Inaccurate Information: Hearing Before the Committee on Financial Services. 19 Jun 2007.
5. ^ Report to Congress on the Fair Credit Reporting Act Dispute Process. Federal Trade Commission. Board of Governors of the Federal Reserve System. Aug 2006.
6. ^ Turner, Michael A et al., Give Credit Where Credit Is Due, Political and Economic Research Council, 1.
7. ^ http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/creditscore.pdf
8. ^ "Facts & Fallacies". Fair Isaac Corporation. http://www.myfico.com/CreditEducation/FactsFallacies.aspx. Retrieved 2007-08-08. 
9. ^ "What’s In Your Score". Fair Isaac Corporation. http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx. Retrieved 2007-08-08. 

Retrieved from "http://en.wikipedia.org/wiki/Credit_history"

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Building your credit history

Source : http://www.creditorweb.com/ permits to republish here.


Today, credit is an indispensable part of our lives. In order to get the things you need, such as a home or a car, you have to apply for a credit.
But you cannot get a credit without having a credit history, and you cannot get a good quality credit without having a good credit history.
So, it is important to start building your credit history when you're young.


When applying for a credit, if you don't have a credit history, it is possible your credit application to be denied. This means you definitely need to start building a credit history.
There are different ways to start a credit history.
If you're a student, you can get a student card from the companies that offer such special cards. On this credit card you can charge your necessities and at the same time build your own credit history.


When you're a young adult and you have always used checks or paid cash for your purchases you'll soon realize that you cannot apply for a credit as you don't have a credit history.
A secured credit card can really help you.
These secured credit cards are considered a first step for those with no credit history.
For obtaining a secured credit card a deposit is required and the spending limit is equal to the amount of the deposit.
To make sure you're building a good credit history with this first credit card, be careful not to go over the limit and pay your bills on time.
After some time, depending on each company, you can apply for an unsecured credit card but only if you have a good credit history.


There are also other more simple ways of starting a credit history.
One easy solution is to open a savings or checking account that will definitely show how you are able to manage your money.
Or if you have a cellular phone or a pager and pay your bills on time every month, you can demonstrate that you're capable to control your money wisely.
Another way is to consider applying for a card offered by gasoline companies or retail stores. This type of card has a low credit limit and can be paid off each month.


All above methods are just first steps in building a credit history.
The next steps are also important because they will greatly influence the history you have started building.
Every time you pay or not pay a bill on time your credit history registers it.
Having a good credit history shows that you are a person that treats debts responsibly and you're likely to pay back the money that you want to borrow.
To gain the confidence of the credit companies they have to see on your credit history that you treat with responsibility every bill.
So make sure to pay the total minimum due on every one of your bills and do an effort to pay them by the statement due date so that they arrive on time.
Also do you best to pay at least the minimum, if not the entire, balance each month.
Try to never skip payments; it doesn't look good on your credit history.


If you ever feel that your debts are getting out of control, immediately seek help from a financial counselor. He will be able to evaluate the entire situation better than you can and he can find the best solution that will get you out of that massy situation.
A financial counselor will also advise you to annually check your credit report for any errors that may appear.
Then, if any errors are present, correct them immediately.


It is not difficult to start building a credit history; it just takes time and a lot of patience from your side.
Yet, we have to admit that the difficult part is to build a good credit history for which you must be able to demonstrate that you can wisely manage your money.
Keep in mind that a good credit history will only bring you benefits.

This article is courtesy of CreditorWeb.com, where you can compare business credit card offers and apply for credit cards online.

Click ref : Credit Score --- Credit Repair --- Payday Loan/Mortgage/Grants

Payday loan - Wikipedia

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Souce : Wikipedia permits to republish here at based on restrictions Creative Commons Attribution-ShareAlike License  and http://creativecommons.org/licenses/by-sa/3.0/ Contents in wikipedia is frequently revised and I endeaver to put in the latest version here.
But I suggest you visit them frequently just in case.

<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

From Wikipedia, the free encyclopedia

This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (November 2008)

This article needs attention from an expert on the subject. See the talk page for details. WikiProject Finance may be able to help recruit an expert. (March 2009)

A shop window in Falls Church, Virginia advertises payday loans.

A payday loan (also called a paycheck advance) is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card (see cash advance). Legislation regarding payday loans varies widely between different countries and, within the USA, between different states.

Some jurisdictions impose strict usury limits, limiting the annual percentage rate (APR) that any lender, including payday lenders, can charge; some outlaw payday lending entirely; and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between nominal APR and effective APR (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.15²⁶ − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.

Payday loans carry substantial risk to the lender; they have 10-20% default rate^[1], and according to one study, defaults cost payday lenders around a quarter of their annual revenue.^[2]

Contents [hide] 1 The loan process 2 Opponents Charges 2.1 Draining money from low-income communities 2.2 Exploiting financial hardship for profit 2.3 Aggressive advertising practices 2.4 Aggressive collection practices 2.5 Ignoring legal restrictions 2.6 Pricing structure of payday loans 3 Proponents' stance 3.1 Charges are in line with costs 3.2 Markets provide services otherwise unavailable 3.3 Household welfare increased 4 Payday loans around the world 4.1 Australia 4.2 Canada 4.3 UK 4.4 United States 5 Variations and alternatives 5.1 Alternatives to payday loans 5.2 Variations on payday lending 6 See also 7 References 8 External links

The loan process

The basic loan process is simply that a lender provides a short-term unsecured loan to be repaid at the borrower's next pay day. Typically, some verification of employment or income is involved (via pay stubs and bank statements), but some lenders may omit this. Individual companies and franchises have their own underwriting criteria.

In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check. If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees and/or an increased interest rate as a result of the failure to pay.

In the more recent innovation of online payday loans, consumers complete the loan application online (or in some instances via fax, especially where documentation is required). The loan is then transferred by direct deposit to the borrower's account, and the loan repayment and/or the finance charge is electronically withdrawn on the borrower's next payday. According to some sources, many payday lenders operating on the internet do not run credit checks or verify income.^[3]

Opponents Charges

A concern has been raised that this article's Criticism section may be compromising the article's neutral point of view of the subject. Possible resolutions may be to integrate the material in the section into the article as a whole, or to rewrite the contents of the section. Please see the discussion on the talk page. (February 2010)

Payday lending is a controversial practice and faces both legal battles and public perception challenges in nearly every place where it is practiced.

Draining money from low-income communities

People who resort to payday lending are typically low-income people with few assets, as these are people who are least able to secure normal, lower-interest-rate forms of credit. Since the payday lending operations charge such high interest-rates, and do nothing to encourage savings or asset accumulation, they have the effect of depleting the assets of low-income communities.^[4]

Exploiting financial hardship for profit

Critics such as Consumers Union blame payday lenders for exploiting people's financial hardship for profit. They say lenders target the young and the poor, particularly those near military bases and in low-income communities. They also say that borrowers may not understand that the high interest rates are likely to trap them in a "debt-cycle," where they have to repeatedly renew the loan and pay associated fees every two weeks until they can finally save enough to pay off the principal and get out of debt. Critics also say that payday lending unfairly disadvantages the poor, compared to the middle class who pay at most 25% or so on their credit cards.

Aggressive advertising practices

Debt charity Credit Action made a complaint to the UK Office of Fair Trading (OFT) that payday lenders were placing adverts on social network website Facebook which broke advertising regulations. Their main complaint was that the APR was either not displayed at all or not displayed prominently enough, which is clearly required by UK advertising standards. ^{[5] [6]}

Aggressive collection practices

In US law, a payday lender can use only the same industry standard collection practices used to collect other debts.
In many cases, the borrower has written a post-dated check to the lender; if the borrower defaults, then this check will bounce. Some payday lenders have therefore threatened delinquent borrowers with criminal prosecution, for check fraud.^[7] This practice is illegal in many jurisdictions.

Ignoring legal restrictions

Payday lenders have been known to ignore usury limits and charge higher amounts than they are entitled to by law. On May 30, 2008, the Illinois Department of Financial and Professional Regulation fined Global Payday Loan $234,000—the largest fine in Illinois history against a payday lender—for exceeding the $15.50 per $100 limit on charges for payday loans.^[8] A customer, known only as J.M., borrowed $300 and repaid $360 ($13.50 more than the company was legally entitled to collect under the Illinois Payday Loan Reform Act), but the company was still sending her warnings that her account was 'seriously delinquent' and that her unpaid balance was $630.

Pricing structure of payday loans

Issuers of payday loans defend their higher interest rates by saying processing costs for payday loans do not differ much from other loans, including home mortgages.^{[citation needed]} They argue that conventional interest rates for lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs.
Critics^[who?] say payday lenders' processing costs are significantly lower than costs for mortgages and other traditional loans. Payday lenders usually look at recent pay-stubs, whereas larger-loan lenders do full credit checks and make a determination about the borrower's ability to pay back the loan.^{[citation needed]}

Proponents' stance

Charges are in line with costs

A study by the FDIC Center for Financial Research^[9] found that “operating costs are not that out of line with the size of advance fees” collected and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security, ordering a check stopped, or closing their account.^{[citation needed]}
Critics concede that some borrowers may default on the loans, but point to the industry's pace of growth as an indication of its profitability. Consumer advocates condemn the practice as a whole, regardless of its profitability, because it "takes advantage of consumers who are already hard-pressed to pay their debts".^[10]
According to the Dallas Morning News, in 2008 the U.S.'s largest payday lender, Advance America, "made $4.2 billion in payday loans and charged $676 million in interest and fees." And "Cash America, a pawnshop operator and payday lender based in Fort Worth, recorded net income of $81 million last year – a 132 percent increase in just four years – on total revenue of $1.03 billion."^[11]

Markets provide services otherwise unavailable

Opponents of government regulation of payday loan businesses argue that some individuals that require the use of payday loans have already exhausted or ruined any other alternatives. Such consumers could potentially be forced to turn to loan sharks or other illegal sources if not for payday loans. Tom Lehman, an advocate of unfettered payday lending, said,

[P]ayday lending services extend small amounts of uncollateralized credit to high-risk borrowers, and provide loans to poor households when other financial institutions will not. Throughout the past decade, this "democratization of credit" has made small loans available to mass sectors of the population, and particularly the poor, that would not have had access to credit of any kind in the past....^[12]

Lehman attacked proponents of increased regulation of the lending industry, arguing that,

These allegations against the payday-lending industry are largely without merit, and generally reflect the views of "do-gooder" anticapitalist elites who abhor the "messy" and unplanned outcomes in low-income consumer finance markets. Rather than seeing payday lending practices as a creative extension of credit to poor households who may otherwise be without loans, these critics see it as yet another opportunity for government intervention in the name of "helping" the poor.^[12]

Lehman has in turn been criticized for presenting himself as an independent voice while taking money from the payday loan industry.^[13]

Household welfare increased

A staff report released by the Federal Reserve Bank of New York concluded that payday loans should not be categorized as "predatory" since they may improve household welfare.^[14] "Defining and Detecting Predatory Lending" reports "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it." The author of the report, Donald P. Morgan, defined predatory lending as "a welfare reducing provision of credit." However, he also noted that loans are very expensive, and that they are likely to be made to under-educated households or households of uncertain income.

Other studies have questioned this claim. Petru Stelian Stoianovici, a researcher from The Brattle Group, and Michael T. Maloney, an economics professor from Clemson University, found "no empirical evidence that payday lending leads to more bankruptcy filings, which casts doubt on the debt trap argument against payday lending."^[15]

Payday loans around the world

Australia

Main article: Payday loans in Australia

The Australian states of New South Wales and Queensland have imposed a 48%-APR maximum loan rate, including fees and brokerage.^[16][17]

Canada

Main article: Payday loans in Canada

Payday loans in Canada are limited by usury laws, with any rate of interest charged above 60% per annum considered criminal according to the Criminal Code of Canada. In addition, the provinces of British Columbia and Saskatchewan have imposed specific regulations on payday loans, including lower interest rate caps.

UK

Main article: Payday loans in the United Kingdom

Payday loans in the United Kingdom are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006 - in 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion.^[18] The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective annual percentage rate (APR).^[18]

United States

Main article: Payday loans in the United States

Payday lending is legal and regulated in 37 states. In 13 states it is either illegal or not feasible, given state law.^[19] When not explicitly banned, laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by annual percentage rate (APR). Since Oct. 1, 2007 a federal law has capped lending to military personnel at a maximum of 36% APR as defined by the Secretary of Defense.^[20]

Variations and alternatives

Alternatives to payday loans

Other options are available to most payday loan customers.^[21] These include pawnbrokers, credit union loans with lower interest and more stringent terms,^[22] credit payment plans, paycheck cash advances from employers, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans and direct loans from family or friends.
Payday lenders do not compare their interest rates to those of mainstream lenders. Instead, they compare their fees to the overdraft, late payment, and penalty fees that will be incurred if the customer is unable to secure any credit whatsoever.
The lenders therefore list a different set of alternatives (costs expressed here as APRs for two-week terms):^{[citation needed]}

• $100 payday advance with $15 fee = 391% APR;
• $100 bounced check with $48 NSF/merchant fees = 1,251% APR;
• $100 credit card balance with $26 late fee = 678% APR;
• $100 utility bill with $50 late/reconnect fees = 1,304% APR.

Other alternatives include the Pentagon Federal Credit Union Foundation (PenFed Foundation) Asset Recovery Kit (ARK) program.^[23] Through the ARK program, the foundation has helped nearly 4,000 military families with over $1.6 million worth of emergency loans and financial counseling from the highly regarded Consumer Credit Counseling Service.

Variations on payday lending

A minority of mainstream banks and TxtLoan companies lending short-term credit over mobile phone text messaging offer virtual credit advances for customers whose paychecks or other funds are deposited electronically into their accounts. The terms are similar to those of a payday loan; a customer receives a predetermined cash credit available for immediate withdrawal. The amount is deducted, along with a fee, usually about 10 percent of the amount borrowed, when the next direct deposit is posted to the customer's account. After the programs attracted regulatory attention,^[24][25] Wells Fargo called its fee "voluntary" and offered to waive it for any reason. It later scaled back the program in several states. Wells Fargo currently offers its version of a payday loan, called "Direct Deposit Advance," which charges 120% APR. Similarly, BBC reported in 2010 that controversial TxtLoan charges 10% for 7-days advance which is available for approved customers instantly over a text message.^[26]
Income tax refund anticipation loans are not technically payday loans (because they are repayable upon receipt of the borrower's income tax refund, not at his next payday), but they have similar credit and cost characteristics. A car title loan is secured by the borrower's car, but are available only to borrowers who hold clear title (i.e., no other loans) to a vehicle. The maximum amount of the loan is some fraction of the resale value of the car. A similar credit facility seen in the UK is a logbook loan secured against a car's logbook, which the lender retains.^[27] These loans may be available on slightly better terms than an unsecured payday loan, since they are less risky to the lender. If the borrower defaults, then the lender can attempt to recover costs by repossessing and reselling the car.

See also

• Alternative financial services
• Predatory lending
• Loan sharking

References

1. ^ Megan McArdle,theatlantic.com, 18 November 2009, On Poverty, Interest Rates, and Payday Loans
2. ^ Paige Skiba and Jeremy Tobacman, 10 December 2007, [1]: The Profitability of Payday Loans
3. ^ Bachelor, Lisa (2008-05-29). "You can settle the loan on payday - but the APR could be more than 2,000 per cent". The Guardian (London).
4. ^ HaworthPress.com: Howard Jacob Karger, "Scamming the Poor: The Modern Fringe Economy", The Social Policy Journal, pp. 39-54, 2004.
5. ^ "Facebook users warned about ads". BBC News. 2008-05-12. Retrieved 2008-06-10.
6. ^ Credit Action Campaigns on Facebook Debt Ads
7. ^ Fast Cash Loans Charged by State Regulator
8. ^ "Internet Payday Lender Fined More Than $230,000 for Unlicensed Lending In Illinois". Press release. Illinois. 2008-05-30. Retrieved 2008-06-11.
9. ^ Mark Flannery; Katherine Samolyk (2005-06). "Payday Lending: Do the Costs Justify the Price?". Retrieved 2010-10-03.
10. ^ U.S. House of Representatives Committee on Financial Services Democratic Office
11. ^ Dallasnews.com
12. ^ ^{a b} Lehman, Tom. "In Defense of Payday Lending." The Free Market. Mises Institute. Volume 23, Number 9. September 2003. Mises.org
13. ^ This Opinion Brought To You By... Business Week, January 30, 2006
14. ^ "Defining and Detecting Predatory Lending", Federal Reserve Bank of New York Staff Reports, Number 273, January 2007
15. ^ Stoianovici, Petru Stelian; Maloney, Michael T. (28 October 2008). Restrictions on Credit: A Public Policy Analysis of Payday Lending. SSRN. Retrieved 10 August 2009.
16. ^ Interest rate cap, QLD
17. ^ Annual percentage rates, NSW
18. ^ ^{a b} Marie Burton, Consumer Focus, Keeping the plates spinning: Perceptions of payday loans in Great Britain
19. ^ "Payday lenders hope to return in Georgia, 3/18/07". Retrieved 2010-10-03.
20. ^ The John Warner National Defense Authorization Act - Talent Amendment
21. ^ Times Dispatch: Other Options Exist^{[dead link]}
22. ^ "Breaking the cycle of payday loan 'trap'", USA Today, September 19, 2006
23. ^ Asset Recovery Kit (ARK) program
24. ^ "New FDIC guidelines allow payday lenders to ignore state laws"
25. ^ "Wells Fargo puts hold on direct deposit advance", bizjournal.com, June 2, 1997
26. ^ "The cost of convenience". BBC News. 2009-12-11.
27. ^ "Decision of the Trade Mark Registry over "Log Book Loans"" (PDF). UK Intellectual Property Office. 2003-11-26. pp. page 2.

External links

• FDIC Guidelines on Payday Lending

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Categories: Finance articles needing expert attention | Debt | Retail financial services | Personal finance | Credit | Loans

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