Will payday loans affect my credit rating?

By Zarah Mae Torrazo

March 27 2020
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Are you planning to apply for a payday loan but worried it might have an impact on your credit rating?

Payday loans are infamous for being “quick fixes” for people who need fast, small and convenient personal loans that banks and other financial institutions cannot provide. A payday loan can be up to $2,000 and has a maximum repayment period of 12 months.

Payday lenders are known to accept applications from customers with a poor credit history or have low credit scores, making these loans easily accessible to the majority of Australians.

But there are major downsides to payday loans. Due to the high interest rates and expensive fees on these short-term interest loans, costs from this type of loan can spiral out of control and even put borrowers in deeper debt.

Like most forms of credit, payday loan applications can have an effect on your credit score. Payday loans are not entirely bad news for your credit history. However, these short-term cash loans can also keep you from having a clear score.

Here are the ways a payday loan can affect your credit rating.

What are the negative effects of payday loans on my credit rating?

There are numerous ways a payday loan can affect your credit score negatively.

A payday loan can adversely affect your credit score if you fall behind on repayments or default on the loan. While most short-term loans don’t appear directly on your credit report, failing to pay the loan back in full and on time may result in a default.

A default is listed on your credit history if you have failed to make three consecutive loan payments on time and the terms have not been negotiated with the payday lender. If you have defaulted on your loan, this will result in a black mark on your record file. A black mark will lower your credit score. It may also hurt your chances for approval on future loans, as it shows lenders that you are not responsible when managing loans.

Since payday loans are not required to do a credit check during its processing, the majority of payday lenders do not call for a “hard inquiry” on your credit report, which can lower your points for a short amount of time.

However, any application for a loan (whether approved or rejected) is included in your credit report. So, if you apply for too many payday loans in a short period of time or apply for a loan and it is denied, it can lower your score.

If you currently have several other active credit accounts open and apply for a large credit amount, this could also damage your credit score.

To prevent these negative effects, ensure that you are keeping track of the applications you are filling out. You should also be vigilant about changes in your credit report. Consider other alternatives to a payday loan, like applying for a personal cash loan or asking for your relatives for help. If you want to learn how to avoid going broke before your paycheck arrives (which can tempt you to take a payday loan) read here.

What are the positive effects of payday loans on my credit rating?

Payday loans may not always affect your credit score in a negative way. If managed properly, a payday loan can actually boost your credit score. To do this, make your payments on time and make sure to pay it off within the set period. This will be registered as good credit history, which will paint a good picture of you to lenders, as it shows you were able to handle credit properly.

Conclusion

If you are concerned a payday loan may pull down your credit score, the best way may be to steer clear of these fast loans. But if you must, make sure to evaluate a payday loan before applying. You can also use a loan calculator to make sure that you are capable of taking on a payday loan.

Like all types of credit, it’s important to make your payments on time and avoid applying for too many products in a short time period. By doing this, a payday loan can even help boost your credit score by filling your credit report with positive information about your borrowing habits.

Explore nestegg for more tips on keeping your credit score in good health.

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