This week in our ongoing series for Credit Education Month, we’ll be talking about three common lending products that customers may not always know have the potential to have a serious negative impact on their credit. If everyone is doing it, it must be trustworthy, right? Maybe, but it is important to go in with eyes wide open when engaging with these products

1. Store credit cards

Most large retailers these days offer a store credit card option. They have a variety of benefits, often including a percentage off the purchase at the time the card is opened, and generally some form of ongoing benefits such as discounts or points for additional purchases. These cards almost always have subprime terms and are easier for credit challenged customers to open. They can be a low barrier way for those with little or poor credit history to build credit. However, they also have extremely high interest rates and low credit limits. Store credit cards often have an APR of 20% or more, which means that if a customer doesn’t pay off of the balance in full and on time each month, they’ll end up paying even more in interest charges. The low credit limit also means that the chances of using a higher percentage of your available credit go up – which hurts credit scores.

2. Tax Refund Loans

A tax refund loan is similar to a payday loan, a small loan meant to be repaid once a person gets their next paycheck. The idea is that the customer will be receiving money in the near future, and a tax refund loan lets them borrow against the future payment. This is an add-on service that a lot of tax preparers offer. The tax preparer opens a temporary bank account and directs the IRS to deposit the tax refund in this account. The tax preparer issues the loan, either as a check, direct deposit or prepaid debit card. Then, the refund is direct deposited into the temporary account. The tax preparer takes out any fees for the loan, plus the cost of the tax preparation and pays you any remaining money. While this is a quick way to get cash, it is also costly. The customer is essentially paying extra to borrow money that is already theirs in order to get it faster. It is better to wait the few extra weeks and get the full refund amount.

3. Rent-to-Own

Rent-to-Own stores sell items such as furniture and appliances to consumers on an installment payment basis. Consumers agree to a rental contract that is renewed weekly or monthly. An advantage of these stores is that consumers can get products quickly, often the same day. Other advantages are low payments and no credit check, which is appealing to those with a poor credit history. However, this is one of the most expensive methods of ownership, with items typically ending up costing 3 to 4 times the average retail price by the time the contract ends. For example, a washing machine at our local rent to own store sells for around $500 retail but with fees and installment payments would cost around $1250 before tax.