Beware The Recession Vultures!

There are companies out there who will prey on your financial fears. Beware these recession vultures.

Credit card cheques

Credit card companies aren't generally known for their kindness to consumers -- but just recently, some have started to sting us more severely.

Despite the Bank of England's recent base rate cuts, several lenders have actually increased interest rates on their credit cards.

As if that weren't bad enough, there also seems to have been an increase in the number of credit card cheques being mailed out to borrowers.

Credit card cheques are usually bad news, because:

• They often charge hideously high interest rates;
• You may be charged a transaction fee for using them; and
• They are usually subject to negative payment hierarchy.

In my opinion, companies are peddling this poor form of credit to consumers just as many of us are feeling financially vulnerable -- in the hope that we'll fall for the ruse and ramp up their profits in the process.

With Christmas coming up, I predict greedy lenders are likely to put even more credit card cheques through our letterboxes between now and the New Year. However, if you receive credit card cheques offering anything other than a 0% deal, I'd strongly suggest sending them straight to the bin.

Store cards

We at The Fool have never been fans of store cards. In general, they're an expensive form of debt -- and in my view, they're deliberately designed to appeal to the young and vulnerable.

Store card interest rates, like those of many credit cards, have recently been hiked. Some are now hovering at around 30% APR, which is 10 times the Bank of England base rate!

It's not unusual for store cards to be strongly promoted in shops, with offers of discounted goods and exclusive events used to reel in borrowers. And I expect that as recession looms, you'll find yourself being asked if you'd like a store card even more frequently than before.

Even worse, as Rachel Robson recently reported, store cards have now spawned an even scarier sort of credit: the Easy Shop Card. This is marketed as a product that can help people shop simply, "without the worry of over-spending" -- but it charges an astonishing 222.7% APR spread over six months.

In my opinion, only those who can afford to pay off their store card balance in full every month should consider using one. Otherwise, the interest you'll be charged on your store card debt will by far outweigh the initial discounts and deals it offers.

Payday loans

I first wrote about payday loans back in April. A payday loan is a cash advance on your salary which comes from a specialist lender.

When people sign up for payday loans, they undertake to repay the lender as soon as they receive their wages. They also promise to pay a fixed fee in return for the loan.

Unfortunately, these fees often translate to insanely high APRs. For example, an individual who borrowed £200 over a month for a fee of £50 would effectively be paying an APR of over 2,000%!

Even worse, borrowers often do not repay these loans within a single month. Instead, they can be `rolled over' to give them more time -- which also means they incur further lending charges.

Payday loans are unregulated, and online advertising for them has become increasingly aggressive as talk of the coming economic downturn has intensified. Ads for payday loans are often targeted at vulnerable people who are unlikely to get credit any other way -- but it's vital to be aware that using these loans can kick start a dangerous downward debt spiral.

Logbook loans

Logbook loans are similar to payday loans: they are unregulated and horribly expensive.

A logbook loan is secured on your car, which you have to temporarily `transfer' to your lender. If you do not repay what you've borrowed as agreed, your car can be sold at auction to cover the loan amount -- and if your vehicle does not raise enough cash, you can still be pursued for any outstanding debt.

Once again, these loans are intended to appeal to people with either a blemished or non-existent credit history, as Serena Cowdy explains in this excellent article.

Like payday loans, they are also presented as simple and easy to get. Typically, ads emphasise that you could have the extra cash you need within 24 hours -- tempting at a time when money feels short and the cost of living is high.

IVA Companies

For those in serious debt, an Individual Voluntary Arrangement might seem like the perfect solution. As my Foolish colleague Donna Werbner wrote in this informative article: "You are told that the IVA process is free, the interest on your debt will be frozen, and you only have to pay back whatever is affordable every month."

It's likely that, as recession comes ever-closer, some people will become convinced an IVA could end their money worries. However, matters are rarely so straightforward.

When you enter into an IVA, you are often expected to pay your creditors 100% of your disposable income for five years. You are also likely to be required to release equity from your home, which will be used to help repay your debts.

Most importantly, remember: firms that sell IVAs will charge your creditors a fee for negotiating and managing the agreement. Arguably, they have a vested interest in convincing you that an IVA is the best option. What's more, this cost (which may be as high as £13,000!) will be added to the sum you already owe.

In times of trouble, it's sad -- though perhaps not surprising -- that financial products like those I list here will be made easily available to those with existing money troubles.

PPI

Payment Protection Insurance (PPI) is another product you should watch out for as we head towards recession. Now it's even more likely that, if you borrow money, your lender will try to convince you that you need a PPI policy (also sometimes known as Accident, Sickness and Unemployment cover).

These policies can be extremely bad value for money, especially when they are provided by the same company as your credit card or loan. However, new rules on how PPI should be sold have recently been suggested by the Competition Commission. Neil Faulkner explains these proposals here, and in this article explains the best way to get a good deal on PPI if you feel you need it.

If you're struggling, I'd urge you to seek help from the knowledgeable Fools on our Dealing With Debt Discussion Board. You could also seek independent debt advice from the Consumer Credit Counselling Service, Citizens' Advice or National Debtline.

Good luck.

More: Beware Of These Christmas Credit Traps | The Lies You Should Watch Out For | Top Five Ways To Clear Your Debt