Can Payday Loans Hurt Your Credit?

Can Payday Loans Hurt Your Credit?

Have you ever been denied a loan? Well, people borrow money for different reasons. Borrowers are assumed to be rational and will only borrow when it is absolutely necessary. For whatever reason, being denied a loan discourages. 

When it comes to lending money, there are specific conditions that moneylenders set and if borrowers cannot meet them, their application will not be accepted. One of the most important things that clients asses are your credit score. How does credit score influence loan applications? If you have a high credit score, you stand higher chances of being approved for a loan. On the contrary, if your score is low, there are higher chances your application will be rejected. This is because you present higher risks to lenders. If you get approved for a loan, it will be a relatively higher interest. 

In light of the above, it very important to work on improving your credit score. If you already have a good scorer, am sure you want to maintain it. You can easily improve your score if you carefully select the loans to apply. This also involves knowing the right time to apply for a loan. Today we are going to focus on payday loans and the effects they have on your credit. In the course of the discussion, we will respond to the question of whether payday loans can hurt your credit. 

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How Payday Loans Work 

Ideally, payday loans were developed to help individuals meet unexpected costs. You are only supposed to fill the application and in case you are approved, the money will be sent into your account within minutes. The loan is supposed to be paid in two weeks. You will then be required to postdate a check in order to coincide with their paycheck or allow the lender to directly withdraw from your account. That is why checking and comparing loans online using Loan Advisor is very helpful. 

However, payday loans have very high-interest rates, an average of 391%. With a shorter repayment period, there are chances you may be unable to repay in time. What are you supposed to do? Let us answer this question in the next section. 

Effect of Payday Loans on Credit Score 

Can payday loans affect your credit? The answer is “yes”. It can hurt or improve your score. Some lenders have a habit of reporting payments and defaults to credit bureaus. Simply put, payday loans have the potential to impact your credit in some specific conditions. An individual’s credit score is very complex and not just the issue of “good” or “bad”. It is determined not only by your personal history but also by your financial experiences. 

Having bad credit does not mean you defaulted a loan. Credit is built over time and you may have bad credit simply because at no point have you been in debt. This is usually the case with young applicants or those borrowing for the first time. This group of individuals has no alternative ways of ascertaining their credit-worthiness. 

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It is also possible for your credit score to significantly improve if you keep making some minimum payments instead of just paying off the whole amount you owe. This is due to the fact that you are becoming attractive before lenders by paying the interest amount and at the same time meeting your financial obligations.  

Ideally, payday loans and other forms of short term loans are often not preferred when one needs to borrow. Individuals only turn to them in case they need quick cash or when their credit history is poor.  However, it is important to remember that lenders examine credit history in various ways. The decision to accept an application or reject is often based on their in-house analysis as well as credit search with the help of credit reference bureaus. There are so many credit reference bodies out there and since they use distinct mechanisms to rate borrowers, there are chances of having different credit.  

Will payday loans be reflected in your credit history? Yes, it will be visible. A payday day loan will have an effect on your credit history. Basically, your credit file is simply a record summarizing your history of borrowing. For this reason, all loan applications, as well as repayments, will be reflected. The following points illustrate how your credit is likely to be affected by payday loans: 

  • Applying for a loan can have a devastating impact on your credit history. Because lenders make a hard inquiry on your history before a lending decision. Generally, this search has ashortterm negative impact on borrowers’ score. The impact will be felt for a period of between 6 and 12 months but it will be reflected in your profile for 24 months. For this reason, making several payday loan applications within a very short period of time will hurt your credit score. In fact, it will be taken as a sign of irresponsible borrowing or proof of financial distress. This will significantly affect the chances of being approved for a loan in the future. 
  • Responsible will always reexamine your debt-to-income ratio before making a lending decision as well as the credit you can access. This means if you owe payday lenders, the amount other lenders will be willing to offer you may be small. 
  • Missing payments have devastating impacts. The lenders may report to credit bureaus and this will significantly affect hurt your credit.
  • There are cases where lenders have been put off by the fact that a payday loan is reflected on borrowers’ credit history irrespective of whether it was paid back in full and in time. Constant use of payday loans indicates financial difficulties.

The Bottom Line 

Payday loans can hurt your credit. As we mentioned in the preceding section, a hard inquiry may be made on your history and this affects your score for some time. A missed payment can have even more negative impacts. If you anticipate inability to pay off, talk to your payday lender and the amount will be rolled at a cost. Be careful not to find yourself in a vicious cycle of payday loans.