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What is a finance company and how does it affect my credit?

Do not use finance companies if you can avoid them!

A finance company is a lender that targets high-risk consumers. Their loan products are designed to protect them in case their customers don't pay. Basically, they charge all of their customers very high interest rates and have very restrictive credit terms designed to keep tight control over the money people have borrowed from them.

Besides high interest rates and poor treatment, finance companies have another nasty by-product. Simply having them on your credit reports can lower your credit scores -- even if you pay them on time and have very low balances. You could be doing everything right and still suffer simply because you do business with a finance company in the first place.

Consumers who have finance company accounts on their credit reports pose a higher credit risk than those who do not. That’s a statistical fact. And the worst part about them is that once they’re on your credit reports, it’s next to impossible to get them off.

To complicate matters further, you may not want them to come off anyway. That finance company account could be helping the “age” of your credit report and also could be keeping your utilization low if the account is a credit card with a low balance. The trade-off of having the account removed to get the finance company off your report could actually lower your score by lowering its age.

If you get to this stage, it becomes very frustrating because you don’t have any good options -- you're stuck between a rock and a hard place, as the saying goes. This is perhaps the best example of where some sort of education on the subject of establishing credit would have come in handy. In this case, what you don’t know can definitely hurt your credit scores.

So you vow to avoid finance companies at all costs. Good for you…but can you really do it?

Imagine walking into a furniture store and buying an expensive bedroom suite. It’s something that many of us have done or will do. The salesperson will almost certainly offer you some sort of incentive financing such as “same as cash” or a payment deferment of several months or even years. These offers sound great on the surface, but they can negatively affect your credit. Why? Because many of the large furniture and electronics retailers do not have their own banks and instead partner with a finance company!

So, by taking advantage of a special offer to finance a new television set or furniture, you may accidentally open an account with a finance company. Before you sign anything, always read the credit agreement. The fine print will let you know who the retailer's lending partner is and will help you determine if you should avoid them.

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