Why Payday Loans Affect My Credit Rating.
Payday loans are one of the most controversial financial products currently available. While there is no question that payday loans do affect your credit rating, the bigger question is perhaps whether they have a negative or a positive influence. With some payday lenders marketing their products under the guise that consumers will see their credit rating benefit upon repaying on time, it is certainly a question that needs to be addressed.
How Payday Loans Appear on Your Credit File
As with any other type of borrowing, almost all payday loans will appear on your credit file, under the consumer credit section. Remember that your credit file shows the following information:
Credit enquiries, meaning applying for a payday loan, even if you ultimately don’t take out the loan, the enquiry will still appear on your file.
The types of credit you currently have open accounts for.
- The terms of the account, including the opening and closing date. A short time between dates will highlight the short-term nature of the loan and perhaps that it is a payday loan.
- The credit limit of your accounts, in the case of a payday loan this will be the amount you borrowed.
- Repayment history.
- Details of any defaults, judgements and overdue accounts.
Even if a payday loan did not affect your credit rating, lenders are still able to see whether you have any payday loans by looking at your credit file. Some lenders/banks may not lend to you if you have any active payday loan accounts. Others may even have a policy not to lend to you if you have had any payday loans within a specific recent time.
How Payday Loans can be Positive
A payday loan on your credit file may be positive in that, if you meet your repayment obligations to the lender, you will have a clean repayment history and you may be seen as a reliable borrower, at least for this type of financial product.
However, different types of credit are weighted differently when it comes to credit scoring. For example, if you make mortgage repayments on time every month, these are given more weight than a payday loan. The full range of factors listed above can contribute to your credit score, and may also be considered by lenders, who will use your credit score but only as part of a wider consideration of your credit application.
How Payday Loans Can Affect Your Chances of Getting Credit
Depending on the number of credit enquiries you have made, the types of credit you use, and the terms of your borrowing all being visible on your credit file, payday loans may end up contributing to a lower credit score. Even if you prove to be a reliable borrower and never make a late repayment, the fact you are reliant on payday loans can be a signal that your regular financial management isn’t as good as it should be, especially if you find yourself reliant on short term borrowing on a regular basis.
From the perspective of the lender, remember that they are regulated and are duty bound to act responsibly. If you are reliant on short term borrowing on a regular basis, lenders may decide it wouldn’t be responsible to accept you for a long term asset loan or a credit card, as your credit history may raise questions as to how your circumstances would enable you to meet your repayments.
Payday loans tend to have higher interest rates, which means consumers often find themselves repaying one loan but then needing to take out another shortly afterwards. This pattern has the potential to be disastrous for your credit rating and how lenders will view your credit file, so while you may feel you have no option but to take out a payday loan in some circumstances, ideally they are something to avoid at all costs.
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