How Do Payday Loans Affect Your Credit Score & For How Long?

How do payday loans affect your credit report?

Payday loans are a type of short-term loan designed to bridge the gap until your next paycheck comes in. Many people use them to cover unexpected expenses they had not budgeted for, such as emergency repairs. Payday loans are typically for small amounts but can vary from £50 to £5,000. In most cases, a payday loan will need to be paid off in full on your next payday, so they have a short duration.

Anyone who is over 18, lives in the UK and has a steady income could be eligible for a payday loan. It also depends on your credit report on whether you will be accepted for a payday loan or other types of finance. Not only does your credit report impact your ability to get a payday loan, but taking out these short-term loans can affect your rating in future. This guide looks into how payday loans impact your credit report, how long they stay on your credit history, and more.

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What is a credit report?

Your credit report, or credit history, is a summary of your finances. It includes information about your accounts, such as the types of accounts you have and a history of your payments. A credit report has all the details a lender needs to confirm who you are and decide if you are a reliable borrower. Credit reports are created and managed by the Credit Reference Agencies, or CRAs. There are three CRAs in the UK, and each will hold a slightly different credit report for you because not all lenders will report details to all three.

Every time you take out a loan, use a credit card or sign up for a credit agreement, this can be seen in your credit report. All of the repayments you make will also be available in your credit history, and if you have ever made late payments or defaulted on a loan, your credit report will show this. The information in your credit report generates a credit score, which is a number that indicates whether your report is healthy or not.

What does a credit report include?

Your credit report will include:

  • Identification: A credit report does not just show your financial history. Lenders also use it to confirm who you are. It includes personal information, including your name, address, date of birth, previous addresses and more. Identification information does not affect your credit score.
  • Accounts: In your credit report, there will be a summary of all of your accounts and their types. This includes credit cards, mortgages, vehicle loans and student loans. Not only that, the report shows when the accounts were opened, the balances and your payment history for each.
  • Applications: every time you apply for a loan or other form of credit, it will show on your credit report as an inquiry. There are two types of inquiries: soft and hard. A soft inquiry occurs if you check your own credit score or an existing lender runs an account check. A hard inquiry happens when you make a new application for a finance product. Soft checks will not impact your credit score but can be seen on your report; hard checks will affect your credit score.
  • Bankruptcies and collections: if you have ever been declared bankrupt or if you have been referred to a debt collection agency, this will show on your credit report.

When you apply for a payday loan, this is seen on your credit file. Some lenders will only run a soft search which won’t impact your score, while others will run a hard search. Your credit report will include information about your payday loan, including the size of the loan, the date you took it out and your repayment history.

Your questions, answered

Your credit report changes with time, and eventually, some things will be removed from your history. When you take out a payday loan, it is good to know how long it will stay on your report. This all depends on whether or not you repay the loan on time. An unpaid loan or late repayment can remain on your credit history for six years. They are treated in exactly the same way as an overdue credit card, finance agreement or long-term loan. If you repay your payday loan on time and with no issues, it will stay on your credit report for up to 6 years, depending on the credit reference agency. After this time, all records of your payday loan will be removed from your credit report for good.

How a payday loan affects your future credit decisions really comes down to how you use the loan. If you fail to repay your payday loan or pay it off late, it will have a detrimental impact on your credit score. This will remain on your credit report for six years, and all future potential lenders will see this when reviewing your applications. Many lenders will not agree to lend to someone who has previously defaulted on a payday loan.

It isn’t just defaulting on a payday loan that can have a negative impact. Even if you do not accept it, simply applying for a payday loan will show on your credit report if the lender does a hard search. Future lenders will see that you made an application, and multiple applications for payday loans can be seen as a sign of financial trouble.

Although payday loans remain on your credit file, just as all forms of finance do, they are often viewed more negatively than other borrowings. A payday loan may indicate that a borrower has been irresponsible with their money and cannot live within their means. Other lenders commonly see payday loans as a sign that someone cannot manage their budget well and could be risky to lend to. The truth could be that you have resorted to a payday loan because of something completely beyond your control, but your credit report won’t provide your reasons behind the loan. Therefore, lenders will just see that you have had one.

It isn’t all bad news for payday loans on your credit file as, in some cases, they can actually improve your credit score. If you have applied for a payday loan, been accepted and made all your repayments in full and on time, it can give your credit score a boost. Timely repayments on your credit report can demonstrate to future lenders that you are reliable. It proves that you have previously been able to borrow money and pay it back without any issues. For some, having one or two payday loans on a credit report that have been fully paid on time can be better than having no previous borrowing history. Someone who has never had a loan or any form of credit may have a poor credit score because there is no evidence of repayments.

Most people resort to payday loans because they find themselves in a difficult financial situation. You can avoid this by carefully budgeting and putting small amounts of money away in an emergency. If you really need to borrow money but do not want to take out a payday loan, there are alternatives to consider:

  • Friends and family: If you have family or friends willing to lend you the money you need, this can be a great way of avoiding payday loans. You won’t have to worry about high-interest rates and strict repayment deadlines, and your credit report won’t be affected.
  • Credit Cards: A credit card can be an effective way to borrow money when you need it most. Your credit score will still be affected by it, but it will not have a negative impact as long as you make your repayments.
  • Overdrafts: most banks offer interest-free overdrafts up to a certain amount and can be a great way of borrowing money without paying a lot. An overdraft will show on your credit report, but repayments are often much more flexible than with a payday loan.

At The Money Shop, we have a dedicated team and broker partner to help you find the best short-term loans for you and your money. Our team can guide you on payday loans, credit reports and more. If you are concerned about payday loans affecting your credit score or looking for an alternative, we are here to help. Our knowledgeable staff can talk you through all the implications of a payday loan and the different finance products available.