Can payday loans improve your credit score? Yes, absolutely they can. But is a payday loan the best way to improve your credit score? Probably not. We have covered it all so you can understand exactly how a payday loan can affect your credit score.
What is a credit score?
A credit score is a number between 300–850 that shows a consumer’s creditworthiness. Banks and lenders will look at your credit score to gauge how likely you are to be responsible with the money they lend you. The higher your credit score the lower risk you are, the better rates will be available to you. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors.
How can a payday loan improve my credit score?
If you take out a payday loan and make your repayments regularly and on time you can absolutely improve your credit score. Making regular payments and showing banks that you can stick to a repayment plan is a great way to improve your credit score. Payday loans may also be a good option for those who currently have a bad credit score and are looking to improve it, as payday loans are one of the few borrowing options available for people with a poor credit score.
Will applying for a payday loan affect my credit score?
If you apply for a payday loan with Pheabs, it will not affect your credit score at all. However, if you make a number of applications in a short space of time, this can look suspicious to a lender or potential borrowers since it presents the idea that you are desperately short of cash and looking for funds.
So having the odd credit search for a payday loan is fine, even if it does stay on your file for 6 years. But if you are making lots of applications on the same day, this could have an impact on your credit score or how you are viewed by other lenders.
Do payday loans affect your credit?
Payday loans do not affect your credit and it will not make your credit score worsen. If you are fall behind on repayments and are unable to keep up with them, then yes, it will cause your credit score to go down.
But just having a payday loan open will not negatively impact your score. However, it is noted that some mortgage lenders are more cautious to lend to customers who have a recent history of payday loans, regardless of whether they were paid on time or not.
Can payday loans hurt your credit?
Yes, very much so, if you fall behind on your scheduled repayments, this will cause your credit score to fall and you will need to get into the swing of paying off loans on time again for it to improve.
But very simply, if you pay off your loans on time and meet all the repayments, you will not have any issues.
Do payday loans go on your credit report? Are they reported to credit bureaus?
Yes, payday loans will show up on your credit report and they go to credit bureaus who hold real-time information of every individual in the US.
This type of product is like any other credit card, bill or personal loan, since it is included in your credit report and therefore updates if you pay it off on time or miss any repayments – and this is important since every potential lender or vendor you work with needs to know what your most recent financial position is.
Why might a payday loan not be a good way to improve my credit score?
Payday loans are considered quite a high risk way to borrow money as interest rates are often higher than other loans – so they are not deemed the best option to improve your credit score.
If you have very bad credit, then paying off payday loans is only going to help you improve your score – but it is still isn’t the first choice.
So whilst technically paying loans off on time is good for your credit score, you wouldn’t typically want to be known for having lots of payday loans or being reliant on them. There are some other financial products which are better known for improving your credit score, such as credit builder cards and other low-cost, personal loans.
Safe ways to improve your credit score
Here are some quick, easy and safe ways to improve your credit score:
- Clean up your credit report: Before you start trying to improve your credit score, you need to know what you are working with. Websites like AnnualCreditReport.com can give you a credit report from each of the three big nationwide credit reporting companies; Equifax, Experian and TransUnion. You are entitled to one free report every 12 months, so when you request it, be ready to print it or save it to your computer. Look for late payment, if these are incorrect you can dispute them.
- Pay down your balance: How much money you owe dictates a large part of your credit score, so a great way to improve your credit score is to pay off any outstanding debts as quickly as possible.
- Increase credit limit: If you’re not in a position to pay down your balances, you could take a different approach to improving your credit utilization rate. Call your creditor and ask for a credit limit increase. If you have maxed out your $1,000 card and get a limit increase to $2,000. This way you instantly cut your credit utilization rate in half. But, importantly you must not spend any of your new credit.