Avoiding Credit Traps

Over the past few years, you've probably heard many horror stories about people who have been taken advantage of by various credit traps. You receive these offers every day – offers of credit, vacation sweepstakes, equity loans, telephone solicitations and Internet junk mail.

It's important to recognize and avoid credit pitfalls and traps that can severely damage your credit and in some cases, may cause extreme financial hardship.

Predatory lending is commonly defined as abusive lending practices that strip equity away from a homeowner. Predatory lending practices can include:

• People with poor credit – higher-risk borrowers – will often pay more in interest and fees.
  
  
• Targeting low-income people with poor credit and elderly homeowners with a large amount of equity in their home by making unsolicited telephone and mail offers and/or sending "checks" which if cashed, become a loan.
  
  
• Using high pressure sales tactics. These high pressure tactics can include being led to believe that a prepayment penalty mortgage feature is a requirement, not an option. Read our prepayment penalty mortgage borrower information guide to better understand this mortgage option.
  
  
• Stressing paying only the monthly interest on the loan, and consequently there is no equity build-up.
  
  
• Extending a loan to a borrower while knowing the borrower does not have the capacity to repay it.
  
  
• Not reporting good payment performance to the credit bureaus which is necessary for a borrower to improve his or her credit score and the likelihood of qualifying for a lower-cost loan.
  
  
• Packing the loan with single premium credit insurance products, such as credit life insurance.
  
  
• Repeatedly refinancing a loan within a short period of time and charging high points and fees with each refinance.

Questionable or Costly Business Practices and Traps

There are several types of abusive lending practices, scams or other questionable business practices that may strip equity away from a homeowner or place a consumer in financial hardship. What follows is helpful information you may use to avoid these pitfalls.