It can sometimes be difficult to make ends meet, and for some people, payday loans might appear a reasonable way to pay an unexpected bill or simply to bridge the gap to the next paycheck. However, even the best payday loans (opens in new tab) can do more harm than good to a borrower, and should only ever be seen as an option of last resort. One of the biggest risks can be to your debt profile, so do payday loans affect your credit? We take a look.
What are payday loans?
Payday loans are a form of short-term, high-cost credit. They typically have terms of weeks rather than months, but the interest rates can be extortionate – the Consumer Financial Protection Bureau found (opens in new tab) that a two-week loan of $100 can cost $15 in interest, which equates to an eye-watering 400% APR.
The cost may not seem prohibitive to those who simply need a stopgap and are able to pay off the full amount within the initial term, but problems start if the debt has to be rolled over, with additional fees and interest coming into play that add to the overall cost – and so the cycle of debt begins. For this reason, payday loans should only be used once all other options have been exhausted, with personal loans (opens in new tab) and credit cards almost always likely to offer far more favorable terms.
Do payday loans hurt your credit?
Provided you manage the loan effectively and pay the full amount off as agreed, payday loans won’t hurt your credit score. Lenders don’t usually perform a credit check which means a hard inquiry won’t show up on your report, and neither will the loan itself, and as such they can sometimes go under the radar.
However, issues arise if you’re unable to repay the loan in the initial timeframe, and worse, you default on the amount borrowed. If the loan becomes delinquent the relevant credit bureaus will be notified and the debt could be passed onto third-party collectors, which is where payday loans really can affect your credit score.
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How can a payday loan damage your credit score?
It can be all-too easy for payday loan debt to spiral out of control, and the knock-on effects of that can linger on your credit score. If you fall behind on your repayments, your account may be closed or sold onto a third-party collection agency, at which point the debt will almost certainly show up on your credit report. This “bad debt” will then stay on your credit file for seven years, and because it indicates that you have trouble paying bills – and given that payment history is the most important factor of your credit report – it can dramatically reduce your score.
There’s also the chance that the lender will file a lawsuit against those who flee from their payment obligations, and if they win, a judgement will be filed. This can also show up on your credit report, and will stay there for seven years. Then there are the indirect consequences of payday loans – some may find they default on another loan or credit card in an attempt to repay the payday loan first, which can again have a negative impact on credit scores and can make it even harder to get back on a firm financial footing.
Do payday loans help your credit?
No. Most payday lenders don’t initially report the loan to national credit bureaus, which means that, provided you pay it off in the agreed term, it’ll have no impact on your profile. Yet this also means that meeting repayments won’t improve your credit score, unlike with some other forms of credit, so if you’re looking for ways to boost your score, you’re better off looking at alternative credit repair (opens in new tab) or debt consolidation (opens in new tab) methods instead.
Can I get a payday loan with bad credit?
If you’ve already got bad credit and need a cash injection, you may be tempted by payday loans; borrowers simply need to show proof of income and some form of identification, with no credit checks required. This means it’s perfectly possible to secure a payday loan with bad credit, but that doesn’t mean it’s advisable.
Despite payday loans often being small in size, they have short turnaround times which can make them difficult to repay, particularly as they’re often used by those who are already struggling. If you’re unable to repay the amount in time they can negatively impact your profile, making a bad score worse and leaving you in an even worse financial situation – and making it less likely that you’ll be accepted for credit in future. It’s important to remember that payday loans won’t do anything to improve your credit score, either, so if you’re in need of funds, you should always try these alternatives to getting a payday loan (opens in new tab) first.