Does Applying for a Payday Loan Affect My Credit Score?

Does Applying for a Payday Loan Affect My Credit Score?

No,  applying for a payday loan and getting accepted for one does not harm your credit score. In some cases, showing that you can make repayments promptly for a payday loan may help improve your credit score.

Nevertheless, there can be exceptions to the rule as some companies may see taking out a payday loan as a negative thing. This is largely to do with the less than positive perception that the sector has cultivated due to some companies acting badly in the past.

Unfortunately, that means that having a payday loan in some cases could work against you, even if you make prompt repayments. This is one of the things to consider before you apply for a payday loan.

 

How payday loans can improve your credit score

 

It is definitely possible to take out a payday loan and it have a positive impact on your credit score. This is based on you making prompt repayments for the loan in full, plus any interest.

The main reason why a payday loan could improve your credit score is that it shows your capacity to pay loans back on time. Whether you pay promptly, miss payments or default on them entirely this information is all sent to the three main credit reference agencies in the UK.

This financial information is collected and stored on your credit file, which is then looked at whenever you make any applications for credit.

A credit score is changeable as it all depends on your credit behaviour. Therefore, if you make a series of prompt (or late) repayments for a loan, this will improve or worsen your score.

 

Can a payday loan damage your credit score?

 

  • Yes, if you default on payments or miss them
  • You will also need to pay fees and charges

As with any kind of credit, failing to pay the money back or if you make a number of missed repayments will harm your credit score. The same goes for payday loans.

Defaults or missed payments on file could result in a poor credit score, which is something you want to avoid.

 

credit-scores

 

This is because a poor credit score makes it far harder to obtain credit in the future, should you need it. It may reduce the chances of your loan being approved, or you may get less favourable interest terms for credit.

Not only can a payday loan damage your credit score if not used correctly, but you can also incur fees. You will likely need to pay a late repayment fee of £15, alongside interest on the amount outstanding.

 

Does a payday loan make it harder to get credit?

 

No, in most cases following the agreement of a payday loan will not affect your ability to get credit in the future.

But there is lender’s discretion, and some may see payday loans less favourably than others. For example, a mortgage provider could see taking out a payday loan as a sign you may struggle with making sound financial decisions.

If this is the case, the mortgage provider could deem you a risk to lend to if they think there is a chance you will be irresponsible with money. Consequently, you could see your loan application for a mortgage being refused.

However, this isn’t always the case. Many companies offering credit do not see it as an issue if you have taken out a payday loan in the past.

In other cases, those that do see it as a problem may let it slip if you took out the payday loan years ago, or if your financial circumstances have significantly changed since then.