There are many considerations before determining whether payday loans are bad or good for your credit score.
It is often dependent on what your score already is and your immediate financial situation.
Obviously, if you need cash quickly because of an emergency you may not have any other option, so any negative impact the loan might have is outweighed by the situation itself.
Credit Rating Bureaus
Out of all forms of credit, payday loans have the least overall impact on your credit score (good or bad) because of their relationship with the credit bureaus – the organizations that gather information and create your credit score.
In the US there are 3 main bureaus: Equifax, Experian, and Trans Union. Most major lenders will use these when they do a credit check.
Payday loan lenders, however, tend to only report to the smaller bureaus that are often overlooked, so the details about your payday loan may never be discovered by other lenders.
This means on certain applications you make in the future your payday loan will have no impact on your credit score at all.
Payday Lenders Sometimes Don’t Do Hard Credit Checks
Usually, when you apply for a credit card or loan, the lender will run a credit check to determine whether you are a lending risk or not.
In the process, this will be recorded as an “inquiry” which is a message to other lenders that you have been seeking credit.
If you go through a period of making several applications for credit cards, loans, etc, lenders will start to get the impression that you are desperate and therefore might be in a bad financial situation.
Payday loan companies, however, do not usually perform any credit checks, so they leave no inquiry behind and no immediate record that you have applied for the loan.
So any negative result that might come from an inquiry does not apply, regardless of whether you were accepted or rejected.
Bad credit payday lenders don’t carry out credit checks because the loan term is so short (usually only a couple of weeks). Therefore the best measure of your ability to make the repayment is your employment and income situation.
The only scenario where your application could have a detrimental effect on your credit score is if you provide a significant amount of false information and are reported for fraud.
It is therefore important that you are always honest about your income, address, and other personal information. Being reported for fraud is quite rare, however. 9 times out of 10 you will simply be rejected, or they’ll contact you to “clarify” your details.
Don’t Apply Before Applying For A Mortgage
Where payday loans can have a negative effect on your credit rating is when applying for a mortgage.
They are some of the strictest lenders out there and often interpret the fact that you took out a payday loan as a sign that you’ve been in financial trouble (even if you repaid on time).
The rationale is that if you were a respectable borrow you wouldn’t have to rely on a payday loan.
Of course, if you have a great credit rating overall this is likely to have a negligible impact.
On the flip side, if you have bad credit, you probably aren’t looking for a mortgage anyway.
Repayment Is A Positive Sign
If you do have a bad credit rating, taking out a payday loan and repaying in full on the agreed-upon date will at the least have no impact at all, but at best will be positive.
This is because you have demonstrated to other lenders that you can meet terms and make repayments on time. It also reinforces the stability of your monthly income.
Defaults Are A Negative Sign
Likewise, if you default on the loan the best you can hope for is no effect, but most likely it will be recorded on at least one of your credit reports, meaning some lenders who do thorough credit checks may take it into consideration and deem you a lending risk.
Even if the original payday lender doesn’t pass the information on to the big three credit bureaus – if it gets to the point where they pass it on to a debt collection agency – they may do.
So overall payday loans will not harm your credit rating unless you’re going to be applying for a mortgage shortly after, and as long as you make the repayment it can actually help rebuild your rating if you already have a bad score.