Payday loans are short-term loans which are taken against your wages. In many cases, you aren’t even required to have a credit check before taking out a payday loan. However, this does not mean that a payday loan won’t affect your credit history. A payday loan is considered a loan in every sense that a mortgage, car loan, or other loan is. If you pay off your payday loan responsibly, it will help your credit score. If you default on the payday loan, then it can devastate your credit.
Applying for Payday Loans and Credit Score: You can generally apply for any loan without it affecting your credit score. There are exceptions to this though. For example, if you apply for numerous loans at once, the credit bureaus will see that numerous agencies are looking into your credit at once. This is a red flag for them and they may drop your credit score. With payday loans, this isn’t usually an issue because a credit check is not always ever required. You should still never apply for numerous loans at once though; just apply for the loans which you really are serious about.
Having a Payday Loan: Contrary to common belief, just having a payday loan is not going to negatively affect your credit. It is what happens after you get the loan which can affect your credit!
Reporting to Credit Bureaus: Your actions as a borrower will be reported by the lender to a credit bureau. If you pay the payday loan off on time according to the terms, then this will have a positive impact on your credit score. If you fail to pay off the loan, this can negatively impact your credit. For borrowers with solid credit, a small hiccup in paying back the payday loan isn’t going to take a major toll. However, if you default on payment or your loan gets reported to a collection agency, it can have a negative impact for over 10 years.
Using Payday Loans to Rebuild Credit: Responsible borrowers can use payday loans to build or rebuild credit. However, payday loans are not going to have a major positive impact on your credit score. To understand why, you will have to understand a bit about how the credit bureaus calculate your score.
The bureaus look at your entire history of paying off loans and bills to determine whether you are a risky borrower or not. They don’t just want to see your behavior over a short period of time (such as with payday loans), but a long time. For them, regularly paying off a mortgage loan for 20 years is going to mean a lot more than paying off a small payday loan once. By the same standard, failure to pay a short term loan is looked at much more negatively than missing one mortgage payment in 20 years.