How do Payday Loans affect Credit?

How do Payday Loans affect Credit?
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Woman on the computer checking her credit report

Do payday loans affect your credit? How so?

Your credit score, or credit rating, indicates how likely you are to meet your financial commitments.

A good credit score shows that you’ve repaid your debts on time. If you have a poor or bad credit score, this is usually because you’ve missed your payment deadlines or you’ve taken out a lot of credit.

Your credit rating is complex. It’s not as simple as ‘good’ and ‘bad’. It’s based on experience, so you might have a poor credit rating because you’ve never been in debt. On the other hand, your credit rating might improve if you’re only making minimum payments, rather than paying off everything that you owe. This is because you’re an attractive prospect to lenders, continually paying interest on the money that you’ve borrowed whilst meeting your financial commitments.

How do payday loans affect your credit rating?

How do Payday Loans affect Credit?

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Just as with other loans, a payday cash loan can have a positive or negative impact on your credit rating. You might improve your credit rating if you pay it back on time, in full, without missing any deadlines. If you miss repayments or can’t keep up with your debt, the impact will be negative.

Payday loans show up on your credit report. Your details are shared between the lenders and providers of credit ratings, like Experian and Equifax.

Payday loans are high-interest debts, often used in desperate circumstances. Having payday loans on your credit file could suggest that you’re struggling financially.

Does the application process have an impact on your credit file?

Most lenders do what’s called a ‘soft credit search’ or ‘soft credit check’. These won’t affect your credit rating directly like a traditional credit check would. Despite this, a soft credit check can still be a significant mark.

Think of a soft credit check like a footprint in the sand. It will wash away – typically in 12 months – but will exist for a while. Every time you apply for a payday loan, you leave a footprint in the sand to show that you’ve made your application. You don’t have to see the application through. The footprint is left even if you later decide that you don’t want to take out the loan.

One footprint is understandable, but if you’re applying with multiple lenders then you’ll soon leave behind a trail. When you next apply, a lender will see the existing footprints and will know that you’ve made other loan applications. This can impact you negatively, suggesting that you’re desperate for a loan and indicating that other lenders have rejected your application. If you were a lender, would you offer a payday loan to someone that everyone else is turning away?

Man pointing at a screen - Checking Credit Report

How can you reduce the impact of payday loans on your credit score?

    • Don’t make frivolous loan applications. You should only apply for a payday loan if you’re certain that you need one and intend to take it out.
    • Be careful about how often you apply for payday loans. A majority of lenders suggest that you wait at least three months between applications. It’s important not to take risks, so if there’s anything that you can do to increase your chance of acceptance then it’s definitely worth doing this first. Don’t wait to be rejected before trying to improve your situation.
    • Consider using a broker service, such as CashLady. You can make applications to multiple providers at once, leaving just one footprint on your credit file. This also increases your chance of being accepted.