Do payday loans affect your credit score?
All types of loan and credit products will affect your credit score. Whether your credit score is affected positively or negatively will depend on several factors, including how your loan is managed.
Things that could positively affect your credit score
- Repaying your payday loan in full and on time.
- Minimising the number of direct lender applications that you make.
Things that could negatively affect your credit score
- Making a late repayment.
- Missing a repayment altogether.
- Making multiple payday loan applications with different lenders. This could result in several hard searches being carried out, which will harm your credit score.
Are payday loans bad for your credit rating?
Providing you keep your credit applications to a minimum, a payday loan in itself is not necessarily bad for your credit rating.
The impact of a payday loan on your credit score could be positive or negative, depending on how you manage your repayments.
A late or missed payment will be reported to the credit reference agencies (CRAs) and is likely to result in a decline in your credit score.
How can I protect my credit score when applying for a payday loan?
When you make an application for a payday loan with a direct lender, they will complete a full credit check, known as a creditworthiness assessment. Using either a hard search or Open Banking, a creditworthiness assessment allows the lender to assess how you’ve managed credit in the past, as well as your recent financial habits.
You should be mindful of the number of hard searches that are carried out on your credit file; multiple hard searches in a short period will cause your credit score to decline.
One way to potentially reduce the risk of undergoing several hard searches is to use a credit broker, like CashLady.
A credit broker presents your application to a range of lenders to help match you with a loan that could best suit your circumstances. This is done using soft search technology, which will not affect your credit score.
Can I search for a payday loan with CashLady?
CashLady does not work with any lenders of payday loans. The lenders on our panel offer short-term loans with repayment terms from 3 months, depending on the amount of money you apply to borrow.
CashLady could help you search for a loan between £100 and £10,000, with no impact on your credit score.*
Could I get a payday loan if I have bad credit?
It’s worth noting that a payday loan might not be your only choice.
CashLady works with several lenders who offer short-term loans for bad credit, and they could be willing to consider your application.
When applying for a loan with bad credit, it’s important to manage your expectations. It’s possible that your borrowing options could be limited, and if you are approved for a loan, you could be offered a higher rate of interest.
How long will a payday loan stay on my credit report?
A payday loan will remain on your credit report for up to 6 years.
If you default on your repayments, the information will also be visible on your credit report to other lenders. This could harm your chance of being approved for credit in the future, should you need to apply again.
Do lenders check credit ratings?
When a lender, authorised and regulated by the Financial Conduct Authority (FCA), receives your application, they will almost always check your credit score. This will be done as part of their creditworthiness assessment, which, as the name suggests, gives them an idea of how ‘creditworthy’ you are. This will be largely based on how you have managed any past credit commitments.
Some lenders use Open Banking as part of their creditworthiness assessment, which offers a more recent insight into your financial situation. Open Banking can only be carried out by an authorised third-party with your consent.
What does a payday loan on your credit file show?
Typically, borrowers take out a payday loan to help cover the cost of an emergency expense. In the event of a financial crisis, not everyone has savings to fall back on or the possibility to borrow money from a loved one.
Some lenders consider payday loans a sign of poor money management.
However, not all lenders will take this view, and some may still consider your application, especially if your credit record shows that any past credit commitments have been repaid on time.
Could a payday loan affect your mortgage application?
Charity MoneyHelper report that having a payday loan from the last six years on your credit file could be problematic if you were to apply for a mortgage.
As discussed in the section above, some credit providers could view a payday loan as a red flag for money problems.
When a credit provider looks into your credit history, they’ll want to make sure you’re able to afford any borrowing.
While it can feel frustrating, especially if you’ve more recently managed your finances effectively, it’s vital to remember that these credit checks are in place to protect you:
being approved for credit that you can’t afford to repay can lead to all kinds of problems, including a spiral of debt.
How to reduce the impact of a payday loan on your credit score
- Don’t make frivolous loan applications. You should only apply for credit if you are certain that you need it and can afford to repay it.
- Limit the number of payday loan direct lender applications you make. This will minimise the risk of multiple hard searches being carried out.
- Consider using a broker service, such as CashLady. Using just one soft search with no impact on your credit score,* CashLady could scan a panel of over 30 direct lenders to help you find a suitable short-term loan.
- If you take out a loan, be sure to keep on top of your repayments. If you’re worried that you might miss an upcoming payment, it’s important to let your lender know as soon as possible. They will be able to talk you through any options that could be available to help you get back on track.
Where can I get free financial advice?
Free money and debt management advice can be accessed through any of the following charities and organisations: StepChange, MoneyHelper, Citizens Advice, and National Debtline.
*If you’re matched with a loan and make a full application with the lender, a creditworthiness assessment will be carried out. This will involve either a hard search or Open Banking. A hard search will remain on your credit file for up to 12 months. Multiple hard searches within a short space of time will harm your credit score.