Before I learned how to devise a budget, or manage my money so that I had money left over at the end of the month with all my bills paid and a savings cushion, I made many mistakes that eventually ruined my credit. I maxed out credit cards due to impulsive whims; I lived off my credit cards after quitting my 9 to 5 job to run a hot dog stand that only lasted a month, I defaulted on a car loan, I missed payments on a credit consolidation loan, and the list goes on and on. The bottom line was that I royally screwed up my finances because I was impulsive and thought it would all disappear into a magical mist. I’m not sure what I was thinking except that I was young and thought it would all work itself out on its own.

However, after completely ruining my credit, I could no longer extend myself using the usual lines of credit. That was until I was introduced to payday loans . Cha-Ching! All of a sudden I had access to cash even though my credit score was a measly 500 or so (it may have been lower at one point, but I don’t exactly remember.) As long as I had a job, I could get a cash advance on my next pay check up to $500 in cash. In essence, I found another outlet to over extend myself. I’m sure you can already see where this is going -and  it doesn’t have a happy ending.

What I didn’t understand, and may have been one reason I was taking my credit so lightly, was that the interest on a payday loan was pushing 500% annually. No, that’s not a typo – most payday loans hover around a 400% – 500% interest rate. This exorbitantly high interest rate is one reason payday loans become a cycle – I would go in the week of payday, get a loan, then two weeks later I’d have to go back and pay it in full, or take out another one. Well, I normally wouldn’t have the cash available to pay it off due to my poor budgeting skills and so would just take another one out extending the pay off date for eons. Eons is an over statement, but it did take me 2 years to pay off the original loan of $500. Which means I actually ended up paying close to $3,000 over a 2-year period for a $500 loan. That’s an insane amount of money. If I had been more budget-savvy, I would never have had to sink to this level – and I obviously had the money based on the total amount I paid over a 2-year period, just not the skills to save it!

So is there ever a good reason to take out a payday loan? Well, lets quickly run through the pros and cons:

Pros

• Fast cash for those unable to secure any kind of credit
• No credit check, meaning anyone with a job can apply for one

Cons

• Exorbitant interest rates
• Targets people with poor credit, which usually means poor money management skills
• Can lead to a never-ending cycle since most lenders allow you to take one out right after another

Usually the reasons for a payday loan are poor budgeting skills – running out of money before the next pay day. A better approach to solving this problem is better money management skills. Learning how to create a realistic budget, saving a portion of your income, and learning to become a responsible money manager is the best solution to avoiding the trap of a payday loan.

While browsing articles on MSN.com, I came across a startling fact; a particular credit card company will be offering some of their cards at a 79.9% interest rates. This new rate is in response to the new credit card laws going into effect next year. As appalling as a 79.9% interest rate credit card may seem, I wasn’t as flabbergasted by the rate when I found out who was offering it: First Premier Bank. First, let me begin by saying that I’ve known about First Premier Bank for a while now. They target people with crappy credit, and I should know first hand that their credit cards aren’t a great deal. Many years ago, when my credit was in the dumpster, I was offered a First Premier card with an annual fee and a ridiculously high initial fee. The credit line offered was really low, $250. Over the past few years, an occasional application would show up in the mail. I would immediately shred it, knowing that their rates, fees, and limited credit line was probably the worst credit offer in history.

However, they are now offering this new rate to “select customers.” Maybe these “select customers” are on a mailing list with people who have IQ’s below 80. Because, who in their right mind would sign up for a card with a 79.9% interest rate and credit line of $250? Or, maybe they are targeting people who they know are desperate for a credit card to help them  “rebuild” their credit? I’m using the word “help” loosely here, because this company is definitely not helping anyone.

This astonishing rate got me thinking about who really would agree to these terms, and could it work in their favor? I’ve outlined scenarios that have been presented to me during the horrible credit phase of my life. Using my experience to build off of, here is my analysis:

• Rebuilding credit through payment history: Credit cards help build credit, that’s a fact. But they only help if the person is dedicated to using it wisely, meaning charging an amount they know they can pay off before acquiring finance charges. In the case of First Premier Bank, the annual fee would need to be paid off immediately. Then, the card holder could charge a small item and pay it off right away. A person could build a payment history using this card.
• Rebuilding credit through total amount available: The low credit line this card offers isn’t terrific at all, since a portion of  your score is based on how much credit is available to you at any given time – or how trustworthy you appear. In this case, this card really isn’t doing anything at all. It might be better to look into a secured credit card through a reputable bank like Wells Fargo.
• Rebuilding credit through various types of credit accounts: Another element of your credit score is the type of credit a person has: revolving, installment, or charge card. If one were rebuilding their credit and already had an installment loan that was in good standing, for example a student loan,  they may want to secure a revolving line to boost their credit score. If they had been turned down recently through a mainstream credit card, this might be an option. But I would add, this First Premier Bank card  should be a final option after all others had been exhausted.

In summary, this First Premier Bank card looks like a lump of coal. My guess is that their 79.9% card won’t go over well, even on their “select customers.” Since the new credit card law doesn’t cap interest rates, I fear that consumers may be overwhelmed with horrible rates. Our best defense: pay off credit cards in full before interest rates accrue, that’ll show’em!