Payday loans are many times used by those who have gotten themselves in a financial bind and need some money for some temporary relief to get them to their next paycheck. Oftentimes, they have run out of other resources, or do not have the time to wait for the paperwork to clear in order to get a traditional loan. Usually, a payday loan fills in an immediate gap or is used for an unexpected expense or emergency.
Does requesting a payday loan affect my credit score?
One of the things that can have a negative effect on your credit score is requesting too many loans. When creditors look at your credit report they may also consider you a risk if they see you have requested numerous loans in a short period of time. This makes it look like you are in a financial bind and they may consider you a risk.
Each time you fill out a credit card application or apply for a traditional loan, the request is noted on your credit report. This can bring your overall score down once again because it makes it look like there are some financial struggles going on. However, since payday loans are not granted based on your credit score requesting this type of loan it has no effect on your credit score.
What is considered when I apply for a payday loan?
Since payday loans do not check your credit score, what do they use as a basis for granting a loan? They typically look at two things:
- Do you have a bank account in good standing?
- Are you presently employed?
Most payday loan institutions require you to leave a post-dated check to be deposited once your next paycheck hits your bank; or they schedule an automatic withdrawal for the day your loan is due.
Does a payday loan help my credit report or credit score at all?
As mentioned, most payday loan activity won’t ever show up on your credit report. That doesn’t mean that it never influences your credit score. There are three primary credit reporting agencies including:
- Trans Union
These are the big three that everyone watches and worry about the most. Payday loans do not use the information contained on these three credit reports to grant or deny a loan; and they also do not report your payday loan activity to the major credit reporting agencies.
The problem with this is that payday loan agencies do not report your timely payments to the three major agencies. This simply means it’s not going to have a positive effect on your credit score. It’s not going to help you improve your credit score at all, even if you make every payment on time.
Can a payday loan negatively affect my credit score?
Even though payday loan agencies do not report a missed or late payment to the reporting agencies, there are a couple of ways it can negatively affect your credit score. If you don’t pay the loan back as you agreed and the lender sells the payday loan debt to a third party debt collector, the outside party can report it to one or more of the major credit bureaus. Debts that wind up in collection agencies are typically reported on your credit report and have a negative effect on your credit score.
Another way it can have a negative effect on your credit report is if you totally default on the loan and the lender or credit collection agency files a law suit against you. Law suits are a matter of public record and if a judge rules in their favor, it will end up on your credit report as a judgement against you. The judgement will make its way to your credit report and can decrease your credit score and make it difficult for you to obtain credit from other sources.
What can I do if I can’t repay the payday loan?
What happens if you take out a payday loan to help get out of a financial bind, and then realize you cannot pay it back on the due date? There are some options for you to explore if you find yourself in this type of bind.
- Contact the lender and inquire about other payment options – oftentimes they can extend the deadline (for a fee) or make arrangements for numerous payments to be made.
- Borrow funds from a family member or a friend
- Obtain another small loan from your bank or financial institution
- Get a cash advance from a credit card
- Negotiate due dates of other debts so you can make the payment on the payday loan
What can I do about my credit score?
You really can’t afford to ignore your credit score. It can be difficult to think about your credit situation when you are already facing financial difficulties. Even though you know payday loans do not affect your credit score directly, even if you pay them on time, it doesn’t mean you should not worry about your credit score. You should always take advantage of getting your credit report for free so you are always aware of your credit score and what is reported on it. Staying knowledgeable about your credit report you can identify and deal with potential problems such as:
- Any errors you find on the report
- accounts that are in collections
- identify signs of identity theft or fraud
You can get your credit report for free one time a year and there are many tools available to help you monitor your credit report. If you do not know what is being reflected on your credit report, you won’t know what you need to work on.
How can I use a payday loan to my advantage?
Payday loans as you can tell, are not going to directly influence your credit standing. The interest rates on payday loans are substantially greater than other more conventional loans. If it is possible to get the money from another source, it will usually be cheaper in the long run. However, sometimes you can just find yourself in a bind, or an emergency situation and have no other resource for the funds. Sometimes a payday loan is a much faster way to secure funding for an immediate need. To use them to your advantage, take them out only in situations when they are absolutely necessary and pay them back as arranged.