Kimberly Chantal Parkes
Written by Kimberly Chantal Parkes

Kimberly Chantal Parkes is a former contributor to Rixloans. Kimberly Chantal is a freelance copy editor and writer with a specialization in personal financial planning. After having graduated from Kansas State University with a bachelor's degree in journalism, she began her career in media wearing many hats for community newspapers within the Kansas City area: writer as well as copy editor, photographer and coffee runner among other things.

Hasna Begum
Edited by Hasna Begum

Hasna Begum, an adept editor at Rixloans, is a graduate of Washington University, where she honed her skills and passion for communication. With a keen editorial insight, Hasna contributes to Rixloans by crafting compelling content that resonates with audiences, reflecting her dedication to excellence in the field of finance and lending.

Credit scores play an increasingly key role in determining one’s financial stability in today’s society. A good credit score opens up better loan rates and job opportunities. People usually turn to payday loans to make ends meet during unexpected expenses or financial hardships. But how do short-term loans affect your credit score compared to using credit cards?

RixLoans explores the impact of payday loans and credit cards on your credit score. Examining the differences between the two forms of lending provides readers with clarity on which option is best for their financial situation. Understanding the effects of payday loans and credit card usage on your credit score helps you to make more informed decisions about managing your finances and achieving long-term financial success.

Understanding Payday Loans

Around 12 million Americans use payday loans every year, according to LendEdu. Such a figure is alarming, given that short-term borrowing schemes have been associated with high-interest rates and predatory lending practices.

Number of payday loan borrowers each year12 million
The average income for the payday loan borrower$30,000 annually
Percent of borrowers who cannot easily cover monthly expenses58%
Total loan fees paid by payday loan borrowers each year$9 billion
The average duration of payday loan debt5 months
Payday loan statistics

Payday loan regulations vary by state, but most states have implemented laws to protect consumers from falling into debt traps. Many people who obtain payday loans find themselves in a cycle of debt due to the exorbitant interest rates charged on their loans, despite the protective measures.

Predatory lenders usually target vulnerable populations such as low-income earners or people with poor credit scores. Payday loans seem easy to get quick cash, but borrowers must review alternative options such as credit unions or personal loans before borrowing.

Pros And Cons Of Payday Loans

Payday loans provide a convenient and quick way to access funds when traditional loan sources are unavailable. The high-interest rates associated with payday loans lead to a debt cycle of borrowing and repaying. Credit cards offer a better option for individuals who need to borrow money. Credit card interest rates are generally lower and more manageable than payday loan rates. The ability to access credit through credit cards requires a good credit score.

Pros Of Payday Loans

Payday loans provide short-term benefits for individuals who are in need of emergency funding. The pros of payday loans are their easy accessibility.

  • Such loans do not require a credit check, making acquiring them easier for people with poor credit.
  • The approval process for payday loans is quick, and borrowers complete it within hours.
  • Another benefit of payday loans is that they help improve an individual’s credit score if they make their payments on time. It seems counterintuitive as payday loans are notorious for high-interest rates, but timely payments show lenders that the borrower is responsible and reliable when repaying debts.

Cons Of Payday Loans

Payday loans provide quick and easy access to funds, but borrowers must review several potential drawbacks.

  • The most significant cons of payday loans is their high-interest rates, which lead to a cycle of debt for people who cannot repay the loan in full on time. Such a debt trap is particularly dangerous for individuals with limited borrowing options.
  • A few critics argue that payday lending practices are predatory, targeting low-income individuals who do not fully understand the terms and costs of such types of loans.
  • Regulations exist to protect consumers from abusive lending practices, and borrowers must carefully read and understand all loan agreements before obtaining a payday loan.

Payday loans offer a short-term solution for people needing emergency funding, but borrowers must approach them cautiously and only use them as a last resort.

Understanding Credit Cards

Credit cards are a popular financial tool that helps you to build and maintain a good credit score. They work by allowing you to borrow money up to a certain limit, which you pay back with interest over time.

The primary benefit of using credit cards is that they have lower interest rates than payday loans, making them a more affordable option for borrowing money. Credit cards have rewards programs that allow you to earn points or cashback on your purchases. Borrowers redeem such rewards for travel, merchandise, or other perks.

Credit cards have fees such as annual fees or late payment penalties. Staying within your credit limits, making payments on time to avoid such extra costs, and maintaining good standing with lenders are key to responsibly using a credit card.

Pros And Cons Of Credit Cards

Credit cards offer a number of advantages to consumers, including convenience, the ability to build credit, and rewards programs. They have risks, such as high-interest rates, the potential for overspending, and identity theft. Credit card rewards programs allow cardholders to accumulate points or cash back from purchases. They offer exclusive discounts and access to special events. Such rewards have the risk of spending more than necessary in order to accumulate points.

Pros Of Credit Cards

Credit cards offer numerous benefits that help improve your credit score. The following are a few advantages associated with credit cards.

  • The most significant advantage is the ability to earn rewards for purchases made on the card. Many credit cards have reward programs that allow you to accumulate points or cashback, which borrowers use towards future purchases or even transfer into savings accounts.
  • Using a credit card responsibly and making timely payments shows creditors you are financially responsible. It helps build trust with lenders, leading to an increase in your credit limit over time.
  • The convenience factor associated with credit cards cannot be ignored either. One swipe or tap enables you to make purchases without carrying large sums of cash.
  • Using a credit card does not require extensive paperwork or approval processes that take days or weeks to complete, unlike payday loans.
  • Lastly, security measures such as fraud alerts and zero-liability policies protect unauthorized transactions, further boosting your financial safety net.

Cons Of Credit Cards

Credit cards have numerous benefits, but you must review the potential downsides. The following are a few disadvantages associated with using credit cards.

  • One major concern with credit cards is their high-interest rates, which lead to debt accumulation if not managed properly.
  • Making only minimum payments on a credit card balance prolongs repayment, resulting in significant interest paid over time. Late fees are a common consequence of missed or delayed payments.
  • Rewards programs seem advantageous, but they encourage overspending and impulse buying. You must weigh the value of rewards against the cost of accumulating debt that outweigh any benefit gained from earning points or cashback.

Credit cards offer many advantages, but it is necessary to use them responsibly by paying attention to interest rates, avoiding excessive spending habits encouraged by rewards programs, and staying vigilant about making timely payments to avoid late fees or accruing unnecessary debts.

Credit Card Rewards

Credit card rewards are one of the primary benefits that attract people to use credit cards. Such programs offer cash back, travel rewards, points systems, sign-up bonuses, and redemption options that appeal to consumers seeking financial incentives.

Cashback programs allow users to earn a percentage of their purchase back in cash, while travel rewards provide opportunities for free flights or hotel stays. Points-based programs reward customers with redeemable points that add up quickly with frequent use.

Many credit card companies offer enticing sign-up bonuses to new customers who meet certain requirements within a specified timeframe. Redemption options vary depending on the type of rewards program the issuer offers.

Regardless of the type of reward earned, you must avoid overspending in pursuit of such benefits as doing so results in carrying high-interest debt balances that outweigh any potential value gained from the rewards program.

Impact On Your Credit Score

Your credit score is a numerical representation of your creditworthiness, which lenders use to determine your eligibility for loans, credit cards, or other financial products. Several factors contribute to your credit score, including the following.

  • Payment history makes up 35% of your total score and refers to how frequently you pay your bills on time.
  • Credit utilization accounts for 30% of your score and measures the available credit you have used. Keeping such a percentage at or below 30% is generally recommended.
  • Length of credit (15%) refers to how long your credit accounts are open.
  • Credit mix (10%) evaluates your different types of credit accounts, such as credit cards, loans, and mortgages.
  • New inquiries (10%) refer to the times you have recently applied for new credit.

Which Option Is Better For Your Credit Score?

Comparing payday loans and credit cards is like choosing between a rock and a hard place when it comes to improving your credit score. Both options have advantages and disadvantages, making it difficult to pinpoint which is better for your credit score.

One key factor affecting your credit score is your credit utilization rate. It refers to how much of your available credit limit you use at any given time. You have a revolving line of credit that allows you to purchase up to a certain amount with credit cards. You maintain an excellent repayment history and improve your overall credit rating if you use only a small portion of the limit and pay off your balance in full every month.

On the other hand, payday loans have high-interest rates and fees, which spiral out of control if not paid back on time. They do not contribute towards building good credit as no fixed payment plan or monthly installment is involved. A well-managed credit card is more advantageous when improving your credit score than obtaining payday loans.


Choosing between payday loans and credit cards is tough when managing your finances and improving your credit score. Payday loans seem like an easy solution for instant cash, but they have high-interest rates and fees that quickly spiral out of control. You must understand both options’ pros and cons before deciding.

Payday loans provide quick access to funds, but they lead to a cycle of debt that negatively impacts your credit score. On the other hand, credit cards offer greater flexibility and rewards but require responsible use to avoid debt. Credit cards help build positive payment history when used responsibly, improving your credit score.

Opting for a credit card instead provides more opportunities for building good financial habits such as timely payments and keeping balances low or paid off each month, leading to better long-term results for your overall financial health.

Frequently Asked Questions

How do payday loans impact my credit score compared to credit cards?

Payday loans only impact credit scores if defaulted, while responsible credit card use builds positive payment history. Cards are better for credit.

Can using credit cards responsibly improve my credit score more than payday loans?

Yes, responsible credit card use builds a strong payment history and credit mix, both of which improve scores. Payday loans don’t help scores.

Are payday loans a better option than credit cards for rebuilding a poor credit score?

No, credit cards allow you to build positive payment history which helps rebuild credit. Payday loans don’t report on-time payments.

What factors should I consider when choosing between payday loans and credit cards for my credit score?

Consider costs, credit impact, ability to repay, and need. Cards build credit but can tempt overspending. Payday loans are expensive.

Do payday loans have a more significant negative impact on credit scores than high credit card balances?

High card balances hurt scores if over 30% of limit. Payday loan defaults damage scores but on-time payments aren’t reported.

Kimberly Chantal Parkes

Kimberly Chantal Parkes is a former contributor to Rixloans. Kimberly Chantal is a freelance copy editor and writer with a specialization in personal financial planning. After having graduated from Kansas State University with a bachelor's degree in journalism, she began her career in media wearing many hats for community newspapers within the Kansas City area: writer as well as copy editor, photographer and coffee runner among other things.