The Worst Type of Credit You Can Get

by Jessica Sommerfield · 8 comments

No matter how fiscally responsible you are, or how much you have in savings, there will be times when life throws you a curve ball you’re not ready to catch.

For instance, what would you do if your spouse suddenly became unable to work, or you were laid off? Many of us have set up an emergency fund for these kinds of situations; they usually contain enough money to support monthly expenses for two to six months.

But what if your financial crisis lasts longer, as in the case of injuries or chronic illnesses? Unfortunately, too many Americans have found themselves in this situation, and have resorted to an unsound option known as a payday loan.

Payday loans are a relatively new phenomenon gaining ground as an alternative for those who can’t get a credit card or bank loan — and feel like they have no other option when money becomes tight. Instead of establishing their credibility, those who wish to receive a payday loan simply need to prove employment and guarantee payback from their next payroll deposit. It seems so simple, easy, and harmless, right?


These companies charge exorbitant interest rates — sometimes over 30% more than credit card companies. Not only this, but cash advance companies offer to re-loan money if you’re unable to pay it back on time, for a “small” fee of say, $50. At the time, you’ll feel relieved you have more time to come up with the money, and you won’t think about how much more you’re actually paying.

In many cases, you might end up paying a payday lender several times the amount of the original loan!

Businesses who offer payday loans are capitalizing on the debt crisis in our country by offering instant cash to those who are desperate for it. These loan sharks operate as legitimate businesses, but are essentially taking advantage of the poorest and most debt-laden in our society.

In my opinion, no matter how desperate the situation is, you should do everything you can to steer clear of these money-sucking lenders. They are a worse choice than credit cards.

Three Alternatives to a Payday Loan

1. Ask for help from a friend or family member

It can be humbling and embarrassing to admit you need financial help — but these are the people you can trust the most, who won’t take advantage of you, and who will be the most gracious about lending you or even gifting you the amount you need. It’s a worthwhile lesson in interdependence to let others help you.

2. Ask for help from a government agency

Find a social service that protects the most vulnerable and provides benefits for those who fall within the qualifying income levels. (In my area, it’s called the Human Development Commission.) Again, it can be difficult to face the stigma of receiving welfare, but if you really need it, you’ll get over it pretty quickly.

3. Talk to your main financial institution

Many people deal with payday lenders because they don’t have another financial establishment — but if you do, a reputation of financial stability will go a long way in securing a small loan. More banks are offering smaller loan amounts to their customers as a better alternative to payday loans. Not only will you be building credit by paying back a bank loan; you’ll likely get lower interest rates.

Whatever financial crisis you find yourself in, remember that there’s no easy way out. It will take time to regain financial footing, but if you do it wisely, you won’t have any regrets or spiral into further financial disaster.

Have you ever taken a payday loan? Would you?

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  • Brian says:

    Hopefully I don’t get to this point in my finances…I don’t think it will happen if I continue using Credit Sesame to optimize my financial situation.

  • debs (@debtdebs) says:

    I find it very sad that there are four of these pay day loan companies in my neighborhood.

  • jim says:

    Great info! Good for you for informing people about this.

  • Dee @ Color Me Frugal says:

    I totally agree that this is the worst type of credit! We’ve never taken out a payday loan and I really don’t think we ever would- too expensive over the long term.

    • David @ says:

      You have it right Dee. Too bad there are still tons of people lining up to go to these payday loan shops to get money because of its convenience!

  • Marie @ Gen Y Finances says:

    Me and my hubs had payday loan. Gladly, it didn’t make into worse. Thanks for this info. I may now be aware of the worst type of credit.

    • David @ says:

      You don’t have them anymore right Marie? If you do, then get rid of them ASAP. Even credit card debt is better so use your cards and pay those loans off!

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