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How do payday loans affect your credit rating?

When applying for payday loans, responsible lenders may run a credit check on your account to evaluate whether you are eligible for a loan or not. The Lenders List features more than 30 payday lenders and the majority of our partners run credit checks as part when making a decision on who gets a loan using credit reference agencies including Equifax, Experian and Callcredit.

By running a credit check, the lender is able to get an idea of how well the applicant has paid other forms of credit in the past such as credit cards, bank loans or mortgage repayments. By understanding the individual’s payment history better, this gives the lender a better indication as to whether they are eligible for a loan or not. Based on the results of the credit check, they can fund the loan, decline the loan or using the credit check to assess affordability (how much the customer can afford), they can change the amount they wish to offer the borrower.

How payday loans affect your credit score

A credit rating or credit score is a numerical expression based on how someone has paid various forms of credit in the past. Some lenders will have it set up in the system to only accept customers with a certain credit score. A score of over 800+ is deemed a very good credit score whereas a score below 600 suggests a very bad credit score.

The first thing that happens as soon as a payday lender checks your credit score is that a footprint is registered on your account. This is like leaving a little mark on your credit file so for any other companies checking your credit too, they can see that you have applied for a payday loan. The footprint from a lender disappears approximately 12 months after the search has been made.

Some lenders won’t think much of this footprint but some other lenders may take this into account when you make your next application. A one-off payday loan application is not going to majorly affect your ability to obtain other sources of credit however applying for numerous payday loans in a short space of time may suggest to another lender that you desperately need funds and your finances are under pressure. This issue is addressed in a question and answers forum on the Experian website on the topic of ‘Do payday loans damage your credit rating.’


Are payday loans good for your credit score?

Payday loans can be good for your credit score but they can also be bad. When you look at from the footprint perspective, having numerous footprints on your file from payday loan companies may prevent you accessing credit from other lenders for things like car loans and mortgages etc. However, since the idea of a credit rating is based on how well you have repaid loans in the past, if you are able to repay your payday loans on time, this may improve your credit score and therefore improve your ability to obtain future credit. It is very simple: if you are applying for a payday loan and the lender runs a credit check on your account and can see in your history that you have paid other short term loans on time, they will more likely fund your loan.

Are payday loans bad for your credit score?

Payday loans can be bad for your credit score if you do not repay on time. This is like any other form of credit. For instance, if you do not pay your credit card bills or bank loans on time, it will be reflected on your credit score – and the same applies for payday loans. If you miss your repayments, if may worsen your credit score. This is why it is important to only apply for a payday loan if you are able to pay it back. Other than the added costs involved for defaulting on your loan like default fees and the daily interest being accrued, there is the additional negative impact it can have on your credit score. Having a bad credit score will affect your eligibility for future borrowing, not just for payday loans but all other forms of credit.

How can you improve your credit score?

Below is a useful video provided by Experian explaining how a credit score works, what affects it and how to improve it:

As the video explains at 1 minute 52 seconds, you’re credit score can change over time so just because you may have a bad credit score now does not mean that it’s can be improved. There are several ways to improve your credit score as discussed by Which.co.uk:

• Joining the electoral roll – all you need to do is register your vote with your local authority. The reason for this is to encourage people to vote and ultimately, if your address is registered with the government, a credit reference agency can find your details easily to run a credit check. This can also help you get phone contracts approved.

Paying credit on time and clearing outstanding credit – as mentioned in this page that paying your loans and credit card bills on time is essential to improve or maintain your credit score. This also goes for clearing outstanding debt. As lenders decide whether to give you a loan or credit card, it will likely help your case if you do not have any current loans or cards in arrears, bringing your score down.

Limiting your search queries – as discussed above, making numerous search queries for loans or credit cards will leave tracks on your credit file and affect your ability to borrow. At The Lenders List, we encourage you to browse through our lenders and find the right loan for you rather than going through each lender one by one as this will leave too many tracks on your file.

Build a good credit history – if you’ve never borrowed before or have only had one loan in the past and you missed repayment, you need to develop a good credit history again to repair your credit score. As mentioned over and over: paying credit card bills and loans on time is key.

At The Lenders List, you can see which lenders run a credit check by visiting the individual pages of our lenders which explains the types of loans they offer and checks that they do. Please visit our homepage for more information about how a payday loan application works and the types of checks that lenders do.

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