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Do payday loans affect your credit score?
A payday loan will not usually impact upon your credit score providing you use it responsibly and repay in full and on time.
Some people worry that taking out a payday loan will have a negative impact on their credit score. Emergency expenses are a part of life and often cannot be avoided. A payday loan can help cover those unexpected bills until your next wage check arrives.
Providing you stick to the terms of the payday borrowing, there should be no negative impact on your credit file. But there are a few points to bear in mind to ensure this does not happen.
Many lenders view payday lending in the same way as other forms of credit. But some might consider that a regular cycle of taking out payday loans could indicate a problem.
As with all financial decisions, it is important to consider all the facts before taking out a payday loan. Make sure you have considered your options first. Payday loans offer a simple short-term solution to cash flow issues. And they can even be used in a way which will benefit your credit score. But failure to stick to the terms can have a long-term impact on your credit file.
What is a payday loan?
Payday loans are usually intended to tide you over until your next wage arrives. They are designed to cover small, unplanned expenses.
Payday loans are often approved for people with bad credit because they are only meant for a short period. Payday lenders realise that everyone has a need to borrow money from time to time.
The interest rates on payday loans are usually higher than other types of borrowing. That is because they are only meant to run for a few weeks and because there is some risk to the lender.
Unlike a personal loan, you don’t usually pay back a payday loan in instalments. However, some lenders offer more flexibility and they may allow you to pay back the loan over a longer period.
Normally you would pay back the full amount of the payday loan, plus the interest and fees, when you get paid or when your cash flow issue is resolved.
Payday loans are generally small in value and will typically range from £50 to £1,000.
In the UK, payday loans are regulated by the Financial Conduct Authority (FCA). This offers reassurance both to lenders and to borrowers.
FCA rules cap the charges on payday loans. If you borrow £100 for a period of 30 days, the rules say that the maximum you will pay back in fees and charges is £24. The FCA also only allow payday loan repayments to a limit of twice the value that you borrowed.
Who can get a payday loan?
Anyone aged 18 or over can apply for a payday loan. Whether you will be approved depends on your personal circumstances and your credit rating. You will usually need a bank account in order to apply for a payday loan and be able to make repayments from it.
Will a payday loan company check my credit score?
A credit score is a collection of data on your current and past borrowing habits. It is the main way that lenders check if your suitability for lending money to.
A payday loan lender will access your credit report and take into consideration your credit score. They will also check your other financial commitments and satisfy themselves that you can afford to make the required payment(s).
Responsible online payday lenders will have a clear and transparent policy in how they deal with borrowers. A reputable company will always perform a credit check before lending. This search will be recorded against your credit file. Regulations for payday loans make it compulsory for each lender to carry out a credit check before granting a loan. Therefore, you should wary of lenders who promise a payday loan with no credit check.
The lower your credit score, the less likely you are to be accepted. Some payday loan companies specialise in offering their products to people with a poor credit score. They may charge a higher rate of interest and additional fees as a result.
Sometimes companies will perform a “soft” credit search first. This gives them an indication of your credit worthiness and financial history. The benefit is that it will not leave a footprint on your credit file.
Lenders can view multiple applications for credit as a negative – as if you were desperate to access funds. They might consider that this indicates that there is a problem. To lessen the impact on your credit score, try to avoid applying for lots of loans and having too many “hard” credit searches appear on your file.
Do payday loans affect my credit score?
Like all types of borrowing, payday loans will usually appear on your credit report. But not always. How and when they appear depends on the lender and on the credit reference agencies.
Credit scores are complex. It can be difficult to understand your own credit rating and how taking out a payday loan will affect it. Some payday loans are not reported to the credit reference agencies at all.
If you can manage to pay back a payday loan back in a few weeks, it is not likely to hurt your credit score at all. Clearing off the balance when it is due will be viewed as a positive. People who occasionally use payday loans are not generally classed as a risk by other lenders. Most people have cash flow issues from time to time after all.
While the majority of people plan to pay back a loan within the given term, other unexpected costs can prevent borrowers from being able to do so. Defaulting on a payday loan can negatively impact your credit score. This can make it harder to gain credit in the future and a default may be reported to a debt collection agency to recover the money owed.
The bottom line is that as long as you make the payday loan repayments in full and on time, the loan may be recorded on your credit file still, but it won’t have a negative effect on your credit score.
If you have had difficulties with debt in the past you may have a low credit score. The same is true for people who haven’t borrowed much before – such as young people – as their credit worthiness is difficult to demonstrate.
If you take out a payday loan and repay it when agreed, it can actually have a positive impact. This shows you can manage a loan and it could increase your credit score.
You might find that some lenders will give applications for certain types of credit greater scrutiny because you have borrowed from a payday lender in the past.
Lenders may take a negative view if you have taken out payday loans regularly. This could limit what financial products and the rates which are available to you. All lenders will apply their own criteria to decide whether or not to lend to you. This means that you could be declined by one company yet be approved by another.
You should also remember that you have more than one credit score. There is more than one credit reference agency in the UK and your credit rating could be different with each. That means that a payday loan may affect your credit score in different ways with different companies.
How long do payday loans stay on my credit report?
Whenever you apply to borrow money, lenders will search your credit report before they offer you a loan.
Once the application has been entered on your credit report, the information will stay there for between one and two years. Again the length of time depends on the credit reference agency and how the loan was managed.
How do late or missed payments on a payday loan affect my credit score?
All late or unpaid loan commitments will stay on your credit file for a period of 6 years. In this regard, credit reference agencies treat payday loans in the same way as any other type of borrowing.
You should note that an unpaid loan will be viewed less favourably than a late repayment on a loan. So if you feel you may have difficulty repaying the payday loan it is a good idea to speak to the lender. They may be able to grant you an extension. In that way, the entry will be listed as a late payment rather than a missed one which is less harmful to your credit score.
How to maintain a healthy credit score with payday loans
There are ways that payday loans can affect credit ratings in a positive way. Taking out a payday loan can help boost your credit score if it is managed carefully and used for certain reasons.
There are some simple steps you can take to ensure you don’t run into problems with a payday loan and have a negative impact on your credit score:
- Be sure you can pay back the payday loan in full and on time
- If you can’t pay your loan back on time, the lender may offer you an extension
- Don’t take out too many payday loans, whether all at once or over a longer period
- Don’t make more than one application at a time
- Do not apply for another payday loan if you’re already struggling to pay one back
Using a payday loan to actually improve your credit file
There may be other ways in which a payday loan could have a potential benefit on your credit score. Managed properly for certain situations, a payday loan can result on a positive impact on your credit rating overall.
If you find yourself in a situation where you can’t pay bills, credit cards, loans or other debts on time, the late repayments on all of these could harm your credit score. If you have repayments to make at the end of the month but find yourself short it will often mean that you don’t make the payment on time. In this situation, your credit score will drop.
Depending on how long it takes you to pay off the bills, say if you fall behind on multiple debts, your credit file could suffer greatly. If you use a payday loan to pay the bills and make payments on other borrowing you might avoid this negative impact. In this way, using a payday loan could be an advantage. You can avoid the hit that your credit file could take by ensuring other bills are kept up to date.
Will a payday loan affect how a mortgage lender views my credit score?
Payday loans won’t directly affect your mortgage or remortgage application. But if you’ve taken out a payday loan in the last six years, then mortgage lenders may become a little wary of your financial history. This could lead to greater scrutiny of your circumstances or your mortgage application being rejected.
One or two payday loans probably won’t affect your credit rating or your mortgage application too much. But it can be worthwhile waiting 12 months since your last payday loan before applying for a mortgage. That way you will know it is less likely to be taken into account.
Payday loans – the bottom line
Payday loans are very useful if you need cash in your bank quickly. If you’re confident you can pay back the online payday loan on time and in full this is great. Use the payday loan wisely – to cover unplanned bills or repayments you think might otherwise be late. Think about how a payday loan can be used to actually benefit your credit score.
But if you aren’t able to manage your borrowing, things can snowball quickly. This is when your credit score will dip as a result of taking out a payday loan.
If you’re worried that you will not be able to quickly repay a payday loan, consider it a sign that it might not a good idea in the first place.
Always ensure you’ve considered all the available options before you apply, and get financial advice from an independent source if you’re not sure. Check your credit score regularly so that you understand what is recorded and how the score itself looks.