One of our most frequently asked questions is “How do payday loans affect my credit?”. It’s a hard question to answer because the answer depends entirely on how you manage paying off your payday loans. But, regardless, it’s an important question to ask and an even more important question to answer. After all, your credit can affect really big, important financial decisions, like buying a house, purchasing a new car, and financing other important purchases.
If you’ve applied for a payday loan, you know that all you need to “qualify” for a payday loan is a bank account, a source of income, and some form of identification (i.e., a license). Payday lenders don’t run a credit check before approving loans. They don’t do much leg work at all to ensure a borrower can actually repay the loan. For many borrowers, this is appealing. However, this doesn’t mean that payday loans are a good option for those who are strapped for cash in a scary financial emergency. It also doesn’t mean that a payday loan won’t affect your credit.
Since a payday lender won’t run your credit when getting approved for a loan, taking out a payday loan won’t necessarily affect your credit. Instead, payday loan companies use your income verification as their credit check. Although payday loan activity doesn’t generally show up on credit reports from the three national bureaus (Equifax, Experian, Trans Union), the Consumer Financial Protection Bureau (CFPB) warns that there are “specialty credit reporting agencies that collect some of your payday loan history” and that it’s possible that lenders may have access to this information.
Unfortunately, for most payday loan borrowers, however, payday loans do wind up affecting their credit and in very harmful ways … not because they took out a payday loan, but because that one payday loan turned into an unmanageable cycle of loans.
The CFPB found that over 80% of payday loans are rolled over or renewed. “And, for more than 80% of those with repeated loan cycles, the loan size and default rate is more likely to go up the longer the loan cycles are extended.” In this report by the CFPB, they “found that half of all payday loans last at least 10 loans long and that 64% of new borrowers become renewers.”
As long as you continue to pay the additional fees you incur, rolling over payday loans won’t affect your credit score, either. But if, like many people, you miss a payment or become so deep in debt that you’re unable to pay off the loan(s), your credit score can be affected.
How Payday Loans Affect Your Credit
The fact that you applied for a payday loan will not necessarily affect your credit, but there are several ways a payday loan can harm your credit. How you handle the payday loan and whether or not you stay on track with payments and fees will determine whether or not a payday loan affects your credit. Not meeting your repayment commitment could mean that your loan is referred to a collection agency. It could also result in a drop in your credit score.
A payday loan requires that you provide a check for the total amount of the payday loan plus additional fees. The check is held until your payday loan is due. At that time, the check can be cashed by the lender. If there aren’t funds in your bank account to cover the total amount of the check, you’ll end up with a bounced check.
Bounced checks don’t directly affect your credit. However, if you bounce a check and do not repay it, the bank can have your account sent to collections. The collection agency can then report this to the credit bureaus, which will negatively affect your credit score.
When Unpaid Loans Go to Collections
There’s one other common way a payday loan can negatively impact your credit. If you don’t pay your loan back in a timely manner, the lender can choose to send your debt to collections. At this point, the collection agency can report this unpaid debt to the national credit bureaus, thereby negatively affecting your credit score. If this debt ends up on your credit report, it can hurt your credit score for up to seven years, even if you pay the collections amount or the judgement against you.
In the event that the post-dated check you provided to the payday lender does not clear the bank and you default on the loan, this also often results in the debt being sold to a collection agency and being reported to each of the three credit bureaus.
According to this article by National Debt Relief, although payday loan debt might seem different than standard personal loan or credit card debt, they work the same way if you’re unable to pay back the money you borrowed. The debt is sent to collections and it ends up negatively affecting your credit.
There is the possibility that a payday lender or a collection agency could sue you to collect unpaid loans and fees. If you weren’t to appear in court or were to lose the case or not pay the judgement, this can show up on your credit report and impact your credit score for up to 7 years.
While taking out a payday loan won’t necessarily affect your credit negatively, the repercussions of payday loan debt can. With 80% of payday loans being either rolled over or renewed, it’s apparent that the payday loan debt trap is very real. For many, it leads to unmanageable monthly payments and taking out payday loan after payday loan to cover the increasing interest and fees from previous loans. This cycle, unfortunately, leads people into financial situations where they aren’t able to pay off their debt, and, this results in negative repercussions on your credit.
So, how do you avoid payday loans affecting your credit? Stay away.
Improve Your Credit Score With Payday Loan Consolidation
Wait, there’s a way to improve your credit score, as well. What if you have already taken a payday loan and are struggling to repay? If you have fallen behind on your payments, your credit score could already have been impacted. The payday loan company could refer your loan to a collection company, who could, in turn, inform the credit bureaus.
Do you have to reconcile yourself to seeing a fall in your credit score? Fortunately, there’s a way out.
Payday loan debt consolidation can help. How does it work? Speak to one of the loan specialists at REAL PDL HELP and find out. We can enroll you in a debt management program that can actually help raise your credit score.
Our debt management programs consolidate all your loans into a single loan with heavily reduced fees and interest, one affordable monthly payment that doesn't change, and an extended repayment period up to 18 months. These programs offer a solution that can help to get you out of payday loan debt quickly while also improving your credit score by preventing your loans from ending up in collections or court. Repayment of your payday loan won't necessarily boost your score, but non-payment will more than likely end up damaging it and by avoiding that damage, your financial outlook improves and you'll be in better position to avoid late payments on other liabilities like credit card debt or a mortgage, which can also be very damaging to your credit.
The bottom line
If you haven’t taken a payday loan yet, the best course of action is to stay away. It’s true that by and large taking a payday loan won’t affect your credit score directly. That’s because payday loan companies don’t usually carry out a credit check before giving you the money.
But if you can’t repay the payday lender, it’s likely that your credit will take a hit.
If you already owe money to a payday lender and find yourself unable to repay, contact REAL PDL HELP. The debt management programs we offer include payday loan consolidation where you'll pay a fraction of what you might have otherwise paid. Our programs can help you escape from payday loan debt and boost your credit score.
Struggling with a cash flow gap and considering payday loan? Read these 4 ways to cope when you’re short on cash without turning to payday loans.
If you’ve taken out a payday loan (or multiple loans) and feel stuck, we can help. Contact us to learn how payday loan consolidation can help you get out of the payday loan debt trap faster.