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.

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.