Do Payday Loans Affect Your Credit Score?
Although payday loans are still a subject of dispute, they come with several advantages that set them apart from traditional forms of lending. One of the payday loan benefits is the so-called no-credit-check process. This means that payday lenders don’t review borrowers’ credit reports through three main credit reporting agencies.
But even though payday loan debt has no direct impact on your credit scores, it can come with potential credit issues. Let’s answer the question, “How do payday loans affect your credit score?” and find out how to avoid the risks associated with this form of borrowing.
Table of Contents
- Do Payday Loans Hurt Your Credit?
- How Does a Payday Loan Ruin Your Credit Scores if You Default?
- Is It Possible to Remove a Payday Loan from Your Credit Report?
- Borrow Reasonably: Ways to Use Payday Loans Without Hurting Your Credit Score
- Alternatives to Payday Loans
- Understanding of Your Credit Score
- What Are Ways to Rebuild My Credit Score?
- FAQ
Do Payday Loans Hurt Your Credit?
In most cases, payday loans don’t inherently hurt your credit rating. This happens because payday loan providers don’t notify major credit bureaus about your application and on-time payments. Additionally, they don’t perform hard credit checks, which can also lower your credit score by a few points. Instead, they check through local agencies that are commonly used by payday lenders only. Such inquiries don’t impact your credit score in any way.
At the same time, there’s one weighty “but” in this system. Payday loans don’t hurt your credit as long as you pay on time and meet the terms of your loan contract. If you default, a payday lender can turn to a debt collector in order to get its money back. This way, your credit history can be damaged almost immediately.
How Does a Payday Loan Ruin Your Credit Scores if You Default?
As we’ve already mentioned, payday loans can ruin your credit scores only under certain conditions. In most cases, it’s only possible if you fail to repay your debt on time. But what exactly will happen after you default on your payday loan? Let’s find out!
First, a payday lender tries either to withdraw money from your bank account or to cash the check you’ve given to it at the moment of getting a loan. If the operation is rejected or the check bounces due to the lack of money in your bank account, you’ll be charged extra fees by both your bank and the lender. Sometimes, lenders can make several trials, so you will be charged for each unsuccessful operation.
If your debt remains defaulted within about 60 days from your due date, the lender is more likely to turn to third parties in order to get its money back. Thus, the loan provider will send your account to a debt collection agency, which will result in phone calls, sending you letters, or even trials to contact the people you’ve specified as references in your loan application form.
Additionally, debt collectors don’t keep your obligations a secret. They always report your missed payments to major credit bureaus, making your credit score drop. If that doesn’t work either, the lender may take you to court. Lawsuits are also reported to major credit reporting agencies, affecting your credit score.
Any defaulted payday loan stays in the system for 6 years. This means that these unpaid payday cash advances can impact your financial future for several years. It will be more difficult for you to borrow money, rent a car or a house, or sometimes get a new job. Therefore, payday loans should always be used responsibly.
Is It Possible to Remove a Payday Loan from Your Credit Report?
You can only remove a payday loan from your credit report if the lender has taken illegal actions against you or if the loan was illegal itself. In any other cases, you need to wait until it falls off your credit report automatically. It can only happen after 6 years.
It’s crucial to take steps toward boosting your credit. This way, you can mitigate the effects of payday loan damage and improve your chance of getting financial assistance in the future.
Borrow Reasonably: Ways to Use Payday Loans Without Hurting Your Credit Score
Some people think that avoiding payday loan debt is the best way to prevent credit score damage. However, it’s not always possible. Payday loans can be a smart solution in some situations, provided that you use them responsibly and assess your situation thoroughly before going into debt. Below are some tips on how to use payday loans without harming your credit scores:
Assess your current financial situation. It’s not recommended to take out a payday loan if you already experience permanent financial difficulties. This way, you increase the chances of late payments, which can result in future financial problems and credit score damage; Don’t consider payday loans as a long-term solution. Bad credit payday loans from direct lenders are quite expensive and come with short repayment terms, which are typically set by your next paycheck. Consider them only as a last resort to cover your short-term needs; Borrow only what you really need. Even if a lender approves you for a higher amount than those you’ve requested, think twice before accepting such an offer. Don’t take more than you need just in case, as it’s more likely to be spent on unnecessary items. It’s recommended to get only what you need for your utmost necessities; Make sure you can afford a payday loan. Before you go into debt, ensure that you can repay it in full without delays on the due date. Otherwise, you may end up getting a second payday loan to repay the existing one; Try to avoid rollovers or renewals. This is because they often come with extra fees, which can be quite high. Next thing you know, you’re paying more in interest than your initial loan amount; Communicate with your lender. Even if an emergency happens, and you can’t repay the loan on time, hiding from your loan provider is not the best idea. Contact it as soon as possible and ask about available options. Some lenders may offer you a convenient repayment plan, allowing you to divide your debt into several monthly payments.
Alternatives to Payday Loans
Even if you have a bad credit score and need emergency cash, a payday loan is not the only option you can choose. Here are some alternative ways to borrow money fast with bad credit.
Installments Loans
An installment loan is an option you can turn to if you’re looking for a more budget-friendly solution. This loan comes with a flexible repayment schedule, allowing you to pay off your loan in a series of affordable monthly installments. The amount you can access is usually up to $5,000 within your solvency. You’re allowed to repay the money within up to 24 months.
Credit Card Cash Advances
A credit card cash advance can be a perfect fit for people who already have a valid credit card. This is one of the easiest loans to get due to the absence of preliminary application and verification procedures. To get one, you need to simply visit a lender’s branch or ATM and withdraw money from your available credit card balance.
However, credit card issuers always share regular credit card purchases and credit card cash advances. Therefore, you may face a higher interest rate that will be charged from the moment you get the money.
Car Title Loans
A car title loan is a short-term loan that requires a repayment guarantee in the form of your vehicle’s title. Therefore, it’s called a secured loan. With its help, you can get up to 50% of your car’s cost and repay the funds by your next paycheck. However, keep in mind that there’s always the risk of losing your auto if you don’t repay the money on time.
Loans from Family or Friends
Don’t forget that you always have the option to borrow money from your loved ones. This won’t affect your credit score in any way, even in case of late or missed payments. However, you’d better ensure you can repay the money timely. Otherwise, it can ruin your relationship.
Understanding of Your Credit Score
A credit score is a numeral representation of your creditworthiness, which is expressed in three digits from 300 to 850. The higher your credit score, the better loan terms you can get. However, your credit rating is not only about your future attempts to get a loan. Bad credit can also play a dirty trick at the stage of renting a house or car, getting a job in a sphere of finance, or getting reasonable insurance rates.
Credit scores are calculated based on many factors. Although each of the three major credit bureaus keeps their determining algorithms a secret, we know what factors can affect your credit score:
Payment history; Credit utilization; Credit mix; Length of credit; New credit.
This means that you need to pay attention to each of the factors above to build and maintain good credit.
What Are Ways to Rebuild My Credit Score?
By knowing what factors to pay attention to, it will be easier for you to create the right strategy to rebuild your credit. However, it doesn’t happen overnight. In most cases, you may need from several months to several years to improve your bad credit score. Therefore, be ready to change your financial behavior and implement new financial habits in your life. Here are a few tips to follow to reach progress as soon as possible.
Pay your bills without delays; Fix existing mistakes in your credit reports, if any; Don’t open new credit accounts within a short period of time; Try to use no more than 30% of your existing credit balances to maintain a good credit utilization ratio; Don’t close your old credit accounts; Make debt consolidation; Try a credit builder loan or a secured credit card.
FAQ
What Are The Main Drawbacks of Payday Loans?
The main drawback of payday loans is that they have high interest rates and short repayment terms. This mix makes them challenging to manage, especially for people who already experience financial problems.
How Long Does a Payday Loan Stay on a Credit Report?
Payday loans stay on your credit report for 6 years.
What Will Be The Consequences of Not Repaying a Payday Loan on Time?
If you won’t repay a payday loan in time, a lender may send your account to a debt collector or even take you to court. All these will negatively affect your credit score. Additionally, you may be charged high fees by both the lender and your bank.
