Twelve Differences Between Payday Lenders and Credit Card Companies

Posted by on Oct 5, 2006 in Articles

Twelve Differences Between Payday Lenders and Credit Card Companies

Due to the popularity of our article Sixteen Differences Between Payday Lenders and Loan Sharks, we decided to compare payday lenders and credit card companies…

The table below lists twelve differences between payday loan and credit card companies (and four similarities).

Criteria
Payday Lenders
Credit Card Companies
Remarks
APR
391% – 782%
7% – 26%
Default rates for credit cards can be as high as 36% APR. Additional fees may be added for credit card cash advances, especially when an ATM is involved. The fine print in some credit card agreements includes fees in excess of $30 each time a consumer takes a cash advance, is late with a payment or goes over their credit limit.
Universal Default
No
Yes
Universal default means that a credit company will apply default rates (up to 36% APR) if you are late in paying another creditor (such as a gas or electric bill), even if you never missed a credit card payment! If the late payment to another creditor was due to fraud or error on the part of the creditor, the credit card company is under no legal obligation to return to the normal (lower) interest rate.
Targets University Students
No
Yes
Credit card companies frequently target university students with direct mail advertising and set up kiosks on campus to offer credit cards to students with low/no income. College students typically get 25 credit card offers every semester. Student credit lines have increased to over $6,000. Sixty percent of college students max out their credit cards during their freshman year. Payday lenders, on the other hand, only give cash to people with a verifiable source of income and thus do not target students.
Reserve the Right to Change Terms
No
Yes
Many credit card companies reserve the right to increase your interest rate for any reason. Payday loan contracts have fixed rates and fees.
First Loan Free
Maybe
No
(but may offer Promotional Rate)
Some payday lenders offer first loan free. Credit card companies may offer promotional interest rates of 0% but only for a limited period of time and subject to conditions.
Arbitration Clauses
Yes
Yes
In the event of a dispute, arbitration clauses put consumers at a great disadvantage. Please read Signing Away Legal Protections for details.
Licensing
Licensed
Licensed
Payday lenders as well as credit card issuing banks are usually licensed by your state’s department of financial institutions.
Lender Bound by Truth in Lending Act
Yes
Yes
Both payday lenders and credit card companies are bound by the Truth in Lending Act. Unethical payday lenders may not abide by certain provisions such as APR disclosure. Please avoid lenders who do not disclose APR.
Repayment Helps Credit Rating
No
Yes
Payday lenders do not report to the major credit reporting agencies so repayment does not help credit rating. Credit card companies, on the other hand, do report to the major agencies so repaying credit card debt on time helps credit rating.
Failure to Repay Harms Credit Rating
Maybe
Yes
A payday lender may send your account to a collection agency which can harm your credit rating. Failing to pay credit card debt will hurt your credit rating.
Harassment Used to Recover Debt
Maybe
No
Unethical payday lenders may resort to harassment.
Threat of Criminal Prosecution Used to Recover Debt
Maybe
No
Threats of criminal prosecution and jail may be used. In most cases, these are nothing more than empty threats.
No-Balance Fees
No
Yes
Some credit card companies charge no-balance fees. If your balance reaches zero, you may be charged a penalty fee. Payday lenders, on the other hand, do not penalize you for repaying your debts.
Partial Payment Accepted
Not Usually
Yes
While there are exceptions, most payday lenders do not accept partial payment. You either pay off the balance in full including interest or you continue to pay expensive extension fees. Please read No Partial Payment for details.
Personal Information Risks
Major
Minor
Depending on their privacy policy, credit card companies may sell your personal information to third-parties including advertisers. While ethical payday lenders will not share your personal information, unethical lenders will sell it to anyone. The risk of personal information leaks are multiplied when dealing with online payday lenders, especially if you are dealing with a publisher/affiliate website rather than an actual lender. More information is available at our Personal Information Risks page.

Although this article compares payday lenders and credit card companies, it does not promote or endorse either.

Used irresponsibly, both payday loans and credit cards will put you on the debt treadmill. Payday loans may get you there much quicker but abusing either product has the same result – financial ruin.

Payday lenders should only be used as a last resort after all other payday loan alternatives have been considered.

Note: In this table we compare credit cards (products with revolving credit which carry forward a balance), not charge cards (which must be paid-off each month in full).

Sources:
College Credit Card Debt (National Public Radio)
Credit Card Sharks by Jim Sollisch (Washington Post)
Credit Cards and You (Financial Consumer Agency of Canada)
Idahoans are Sinking Deeper into Debt (The Idaho Statesman)
Payday Loans, Plastic Can Trap the Unwary by Joe Estrella (The Idaho Statesman)

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