Will Payday Loans Affect My Credit Rating?

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Payday loans are infamous for being “quick fixes” for people who need quick, small, and convenient personal loans that banks and other financial institutions cannot provide. A payday loan can be up to $ 2,000 and has a maximum repayment period of 12 months.

Payday lenders are notorious for accepting applications from clients with bad credit histories or low credit scores, which makes these loans readily available to the majority of Australians.

But payday loans have major drawbacks, some of which are dangerous. Due to the high-interest rates and high fees on these short-term interest loans, the costs of this type of loan can get out of hand and even make borrowers more indebted.

Like most forms of credit, payday loan applications can have an effect on your credit score. Payday loans aren’t all bad news for your credit history. However, these short-term cash loans can also prevent you from having a clear score.

Here are the ways in which a payday loan can affect your credit rating.

There are many ways that a payday loan can negatively affect your credit score.

A payday loan can negatively impact your credit score if you fall behind in repayments or fail to repay the loan. While most short-term loans don’t show up directly on your credit report, failure to pay off the loan in full and on time can result in default.

A default is written on your credit history if you have not made three consecutive loan payments on time and the terms have not been negotiated with the payday lender. If you have defaulted on your loan, this will result in a black mark on your registration record. A black mark will lower your credit score. It can also hurt your chances of getting approved for future loans because it shows lenders that you are not responsible for managing the loans.

Since payday loans are not required to do a credit check while they are being processed, the majority of payday lenders do not ask for a “full investigation” of your credit report, which can lower your score for a short while period of time.

However, any loan application (whether approved or rejected) is included in your credit report. So, if you apply for too many payday loans in a short period of time or if you apply for a loan and it is refused, it can lower your score.

If you currently have several other active credit accounts open and are applying for a large amount of credit, it could also hurt your credit score.

To avoid these negative effects, be sure to keep track of the applications you complete. You should also be vigilant about changes in your credit report. Consider other alternatives to a payday loan, such as applying for a personal cash loan or asking loved ones for help. If you want to know how to avoid bankruptcy before your paycheck arrives (which may prompt you to take out a payday loan), read here.

Payday loans don’t always affect your credit score in a negative way. If properly managed, a payday loan can actually increase your credit score. To do this, make your payments on time and make sure you pay them back on time. This will be recorded as a good credit history which will give a good image of you to lenders because it shows that you have been able to manage credit properly.

If you are worried that a payday loan will lower your credit score, your best bet may be to avoid these quick loans. But if you have to, be sure to evaluate a payday loan before you apply. You can also use a loan calculator to make sure that you are able to take out a payday loan.

Like any type of credit, it’s important to make your payments on time and avoid asking for too many products in a short period of time. In doing so, a payday loan can even help increase your credit score by filling out your credit report with positive information about your borrowing habits.

Explore NestEgg for more tips on how to keep your credit score healthy.

Will Payday Loans Affect My Credit Rating?

Last updated: 04 March 2022

Posted: March 27, 2020

Author: Kimberly Chantal Parkes

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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.

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