Comparing Payday Loan Costs to Credit Card Costs

The biggest complaint people have about payday loans is that they are relatively expensive when compared to more traditional forms of credit. Typically, folks refer to the relatively high APRs associated with payday loans and try to compare those APRs(which can be 200% or more) to the APRs associated with credit cards and other forms of credit.

Well, the comparisons may be getting a little weaker as credit card companies start a barrage of tactics to increase their profits. Here is a quick summary of a few things that have happened over the past few weeks:

• Citibank reneged on its promise (made last year) that they would not increase their credit card rates. In fact, they are going to raise the rates of all cardholders from between 2 to 3 % each month. (bringing the cost of using a Citibank credit card to over 20% APR for most consumers).
• American Express, Citibank, and other large credit card issuers, have been sending out letters to cardholders letting them know that their balance limits have been drastically reduced.
• Credit Card issuers are starting to use more "creative" techniques to calculate the interest you owe each month (of course, the calculations always go in their favor). One technique is called "trailing interest" or "residual interest" where cardholders are charged interest based on previous month's transactions if the full balance is not paid off (this boosts the effective APR considerably, as it adds in extra days to the interest calculation).

At least with payday loans, borrowers know exactly what they are getting (assuming the payday lender fully complies with the TILA disclosure requirements).