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The effect of payday loans on credit history

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

A payday loan can be a good way to get from one month to the next or help you cover the costs of a late, unexpected bill.

As with every kind of borrowing, however, it’s important to consider all the facts first, as you could find that as a short-term solution it ends up having a long-term impact on your finances and credit rating.

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 but high cost, and generally for a relatively small amount of money.

Payday loans are regulated by the Financial Conduct Authority (FCA). FCA rules on payday loans say 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?

As long as you cover your repayments in full and on time, payday loans won’t have a negative effect on your credit score. If you take out a payday loan and repay it when agreed, it can actually have a positive impact. This shows you can stick to the terms of a loan, which can help to build credit.

However, just like any other borrowing, these types of loan will also 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 take a negative view if you’re taking out payday loans regularly, which could limit what products and rates they’re willing to offer you.

So, before you apply, remember that payday loans will always show up on your credit report, for better and for worse.

How long do payday loans stay on my credit report?

Whenever you apply to borrow money, lenders will search your credit report before they offer you a loan. Whatever the type of application made, whether for a mortgage, payday loan or credit card, it stays on your credit report for between one and two years, depending on the credit reference agency.

Lenders use different credit reference agencies to check your details, with different scoring systems in place across all of them. But the detail they record is similar and your payday loan will always be visible, even when it’s paid off and your account has closed.

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 boost your credit score, but only when it’s managed carefully. There are a few ways to ease your financial situation and maintain or improve your credit score.

  1. 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.

  1. Don’t take out too many payday loans, whether all at once or over a longer period

Taking out lots of 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.

  1. 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 aren’t able to manage your borrowing, things can snowball quickly.

Always ensure you’ve considered all the available options before you apply, and 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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