Will a Payday Loan Affect My Credit Score?
4 Min Read
Reviewed by Michael Lefler Payday cash loans are a way to get money quickly, but despite their easy access, payday loans with high-interest rates can result in a cycle of costly financial obligations for borrowers. If you’re considering taking out a financial product from a lender, you may wonder: do payday loans affect your credit?
The short answer is yes, but different from what you think. The truth is payday lenders don’t report your credit score to the credit reporting bureaus, just as banks and federal credit unions do. It means that if you borrow from one, it won’t show up on your credit report or affect your credit score. However, it doesn’t mean it isn’t affecting your financial situation or payment history.
How Can Payday Loans Impact Your Credit?
Payday loans affect borrowers’ credit reports only if they don’t repay the loan on time. Most payday lenders report late payments (not credit scores themselves) to three major credit bureaus as part of their regular reporting practices—and those reports can hurt your FICO score, making it more expensive to borrow money in the future.
Therefore, you must have a steady paycheck and cover your short-term loan fully to avoid unnecessary late charges or other penalties charged by the lender that could affect your credit score.
Options for Paying Your Payday Loans
There are a few different options for paying back your loan, including:
- Paying it off in one lump sum on your next payday.
- Making monthly payments over several months (if you get a payday alternative loan – PAL).
- Rollover to another loan.
What If You Cannot Repay a Payday Loan?
First, don’t panic! The lender might be willing to negotiate with you and allow you to reschedule the loan. Also, they might even offer to extend it to become a longer-term loan. If it happens, make sure you understand the new agreement’s terms before you sign anything. You should know that if you can’t pay back the loan within a short period, you may get hit with additional fees on top of the initial loan finance charge.
If it doesn’t work for you, contact your state’s Bureau of Financial Institutions (BFI) and ask them about how payday loans affect your credit score and what kind of credit check is performed by other lenders in your state. Find out more on how to get out of your payday loan debt.
What to Do if Your Payday Loan Goes Into Collections?
Payday cash loans with soft credit checks are a great way to get a little extra cash when you need it. But what happens if you miss a payment? You don’t have to worry! Here are some tips on what to do if your payday cash advance goes into collections:
- First Step: Call the debt collector as soon as possible.
- Second Step: Ask them what loan amount they need from you.
- Third Step: Ask if they can work with you on payment arrangements or something else that suits you.
- Fourth Step: If not, ask them what will happen if you don’t pay—how long would it take before they go after your wages? Is there anything else that could happen? How much will it cost?
Repairing Credit History After Payday Loan Damage
Payday loans are not a good idea for people who can’t repay them on time. If you find yourself stuck with a payday loan debt, here are some things you can do to try and get out from under it before it does too much damage:
- Check your credit score to find out the actual damage done by your loan.
- Make a list of all the negative information on your credit report and dispute it with the appropriate credit agencies.
- Pay the small loans off on your next paycheck or as soon as possible. You might be able to save money by paying off the debt early and avoiding additional fees.
- Find ways to reduce your monthly expenses to have more dollars available each month. It could mean switching providers for health insurance or cable TV, getting rid of subscriptions like Netflix or Spotify, or even moving into a smaller apartment or house.
- Consider applying for a credit card with lower interest rates and then paying off the balance every month. These loan products will help you build your credit history. Credit card issuers provide a lower interest rate compared to other types of loans.
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