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Do payday loans affect your credit rating?

Find out more about payday loans and how they may impact your credit history, along with tips on improving your credit score.

Payday loans can prove a handy solution to short-term debt. But becoming reliant on them could be harmful for your financial future, as well as your current situation.

As with every kind of borrowing, it’s important to consider all the facts before applying for a payday loan.

What is a payday loan?

Payday loans are intended to tide you over until your next wage arrives. Unlike a longer-term loan, you won’t pay it back in instalments. Instead, you pay back the full amount, plus interest and fees, when you get paid or your cash flow issue is resolved.

Some lenders might give you a longer repayment period, but the common theme is that they’re short-term solutions with a higher cost than most other types of loan. Generally, a payday loan covers a relatively small amount of money.

Payday loans are regulated by the Financial Conduct Authority (FCA). FCA rules on payday loans state that now, if you borrow over 30 days, you’ll pay no more than £24 in fees and charges for every £100 you borrowed. The FCA also placed a cap on payday loan repayments, which means you’ll never pay back more than twice what you borrowed.

Do payday loans affect my credit score?

If you cover your repayments in full and on time, payday loans won’t have a negative effect on your credit score. In fact, payday loans could help you build credit if you repay them as agreed. This is because managing loans properly over time proves you can stick to the terms of a loan and shows lenders that you are a reliable borrower.

Will a payday loan show up on my credit report?

Just like any other borrowing, payday loans will appear on your credit report. You might find that other lenders give future applications greater scrutiny because you’ve borrowed from a payday lender in the past. Lenders may view your credit report negatively if it shows you’ve taken out payday loans regularly, which could limit what products and rates they’re willing to offer you. 

How long do payday loans stay on my credit report?

Whatever the type of loan application, whether for a mortgage, payday loan or credit card, it stays on your credit report between one and two years, depending on the credit reference agency.

Whenever you apply to borrow money, lenders will search your credit report before they offer you a loan. They then use different credit reference agencies to check your details, with different scoring systems in place across them all. But the details they record are similar and your payday loan could show on your credit report for up to 6 years after your account has been paid off.

Can I get a payday loan with poor credit history?

Typically, payday loans are designed to meet the needs of borrowers with a poor credit history. This means, even if you have a low credit score, you may be able to borrow from a payday lender. Remember, every lender is different and will consider each application independently, so there’s no guarantee that your application will be accepted

How to keep your credit score up with payday loans

There are many examples of how payday loans affect credit ratings in a positive way. Taking out a payday loan can help build credit and boost your credit score, but only when it’s managed carefully. There are a few ways to ease your financial situation by maintaining or improving your credit score.

Be sure you can pay it back in full and on time

If you can’t pay your loan back on time, the lender may offer you an extension. However, borrowing money at the kind of rates offered on payday loans, even over a relatively short term, can add unnecessary interest and stress.

Don’t take out too many payday loans

Taking out lots of payday loans will appear on your credit report, which could act as a red flag to other lenders. Plus, if you take out multiple loans at once, you may find your repayments become more challenging.

Don’t make more than one application at a time

When a lender accesses your credit report, it leaves a mark that other lenders can see. Though these might take a while to appear, lenders are likely to be suspicious of someone who’s applying for payday loans through multiple lenders at the same time.

Payday loans can be useful if you need cash in your bank quickly, and when you’re confident you can pay it back on time and in full. But if you can’t manage your borrowing, things can snowball quickly.

Always ensure you’ve considered all the available options before you apply for a payday loan. Get financial advice from an independent source if you’re not sure.

Want to learn more about credit scores? Check out the Know How Blog for more tips and advice.


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