1.) Cash advances on credit cards

Do not do this unless there’s absolutely no other option.  Credit card cash advances typically carry both an upfront fee and a higher interest rate than normal credit card charges.  Interest begins accruing the instant you borrow the money, and most credit card lenders require you pay down the balance on your credit card purchases before you can even pay off the cash advance.  SOLUTION:  Use your credit card to charge purchases normally, or stick to your ATM card.  You’re not going to accumulate credit card interest on normal purchases for at least a month, and using your ATM card is free if you use your bank’s machine.  Even in situations where you have to use another bank’s ATM, the usage fee is much more reasonable than using your credit card for a cash advance.

2.) Loaning money to family or friends or co-signing for a loan

Loaning money to family or friends can definitely turn into a sticky situation, even when expectations are established from the get-go.  Often the parties fail to specify when the loan should be returned, and whether or not they want interest.  Sometimes one party may think it’s a gift rather than a loan, and any of these situations can lead to strained or ruined relationships.  SOLUTION:  If you have the money to give, consider giving it as a gift rather than a loan.  If you can’t afford that, it’s not too hard to go online and find a good sample form to use to establish the loan’s details definitively.

3.) Playing the lottery or gambling

“You have higher odds of contracting a flesh-eating bacterial virus than winning the lottery,” said Dara Duguay, Director of Citi’s Office of Financial Education and author of  Don’t Spend Your Raise and The Citi Commonsense Money Guide for Real People.  While gambling or playing the lottery can seem quite appealing, the odds of winning are abysmal.  SOLUTION:  You’d probably be better off taking a gamble on the stock market if you simply must have that rush.  Alternatively, consider spending your money on a sure bet like traveling to an exotic vacation spot.

4.) Payday loans and refund anticipation loans

Tax refund loans are becoming more and more popular.  Often touted as a surefire way to get quick access to your tax refund, these loans  have become a major profit driver for tax preparation firms.  Keep in mind, though, that they have interest rates fairly equivalent to payday loans.  Payday loans often carry upfront fees, hidden fees and administration fees, not to mention a potential APR of up to 200%.  SOLUTION:  Be patient!   Waiting a little bit to get your money isn’t going to kill you.  And in cases where you do absolutely need the money, it’s better to use a credit card.

5.) Rent-to-own furniture and appliances

Going the rent-to-own route is just not a very good decision.  Typically, rent-to-own customers end up paying two to five times the department store cost of the item, with annual APR amounts running anywhere from 100% to 300%.  Maybe that couch only costs you $50 a month, but it’s going to cost you a lot more in the long run.  Putting it on a credit card with a much more reasonable interest rate and paying it off as you can makes a lot more financial sense.  That, or making due with what you have until you can save the money to buy it outright.  SOLUTION:  Save up money and purchase the item outright.  Also consider buying used furniture that can be found easily via the Web through sites like Craigslist.

If you haven’t already filed for bankruptcy but have done any or all of the above things and are now in over your head, it’s a good time to contact a good, experienced bankruptcy attorney to see what your options are.

Why then do so many let themselves fall into that trap?

According to an article by the Dallas Observer, the rise of online payday lenders is a big part of the problem. While Texas law places limits on the amount of money and number of loans available to borrowers, online lenders in other states can often circumvent those laws because they only have to abide by the laws of their home state—even when granting loans to Texas residents. Additionally, they often bombard people with ads that promise fast cash and no credit checks. That convenience factor often has financially stressed borrowers hitting click before they think through the implications of signing up for a loan which has such a high interest rate.

Critics of the payday loan industry claim lenders care more about profits than legalities, citing the fact that their collection agencies often engage in the practice of threatening borrowers behind on their loans with jail time for not repaying the debt. Too bad this practice is illegal! But what’s worse is the fact that their scare tactics often work on scared borrowers who have no idea that the threat is all bark and no bite. A November 2004 report by the Consumer Federation of America Another found that some internet lenders offer payday loans in all 50 states—despite the fact payday lending is illegal in 15 of them.

As the report says, “Lenders are hard to locate, identify or contact. Some are licensed in their home states, while others hide behind anonymous domain registrations or are located outside the United States.” Which makes it just about impossible for effective government oversight. Some also flaunt the Truth in Lending Act and refuse to disclose information about fees and interest rates, a very big no-no.

Despite the fact that some Texas lawmakers are now trying to crack down on payday lending practices in order to protect consumers, many of those lenders are switching their tactics by registering as credit service organizations (“CSOs”). CSOs help people pay down debt, but they also make loans. In this scenario, CSOs who make loans are considered brokers rather than lenders, and in Texas, brokers can charge whatever fees it wants for its services.

Rich Tomlinson, a Houston attorney who unsuccessfully argued a class-action lawsuit claiming that a Texas CSO had actually acted as the lender rather than the broker, is angry that the payday lenders who have switched to the CSO model claim the switch is nothing nefarious and that they really only have the best interests of consumers in mind. “My loss,” Tomlinson says, “is the template by which these companies stay alive. And that makes me ill.”

If you find yourself taking out payday loans repeatedly, you should really consider seeking out financial counseling. If you’re now caught up in a never-ending spiral of debt because of defaulting on these loans, just be aware that bankruptcy may be the solution so that the rest of your tomorrows can be trouble-free—at least when it comes to the cycle of payday loans.