Are Payday Loans Good For Your Credit Rating?
There is mixed feelings and evidence about whether payday loans are good for your credit rating or not.
The short answer is that it depends on what your goals are and your current situation.
If you truly are in an emergency then a payday loan may be your only option. In that scenario the impact it could have on your score is not going be as important as the issue at hand.
No Impact In The Short Term
There may be no short term impact on your credit rating when applying for a payday loan because usually lenders make their approval decision after considering numerous factors (sometimes they even do not check your credit). They also focus on your income and other indicators of your lending risk. This means that in the beginning there may be no record that you even applied for or were granted a payday loan.
This is good for your credit rating because usually lenders will be able to see if you've recently applied for a bunch of credit cards or others forms of credit, and judge you based on that behavior. For example they may believe you are desperate for credit and therefore may be a risk. If other lenders rejected your applications they might also follow their lead.
With a payday loan they won't have this information right away, if at all.
Don't Lie On The Application
Where you could be caught out in the first stages is if you provide false information on the application form. In extreme cases you could be reported for fraud and this most certainly will be passed on to credit rating agencies, and will represent a big black mark against your name.
Repayment Is A Positive Sign
Like all forms of credit if you meet your obligations and pay off the full amount at the agreed up time, this will be a positive sign on your credit report in most cases. It shows that you are a responsible borrower and can be trusted. This is especially true if you had a bad credit rating at the time of the application. It shows that you are starting to rebuild and might be worth trusting again.
Mortgage Companies Don't Like Them
There is an exception to this rule however and that's with mortgage companies. For whatever reason they are wary of anybody who has taken out a payday loan (even if repaid in full) because it's a sign that your month to month finances might not be in order and you might struggle with mortgage repayments. It's also a sign that other lenders weren't interested because you resorted to applying for the easiest form of credit out there.
So if you are planning to apply for a mortgage in the near future a payday loan might not be the best idea.
Of course if you had a terrible credit history to begin with you'd also be rejected for a mortgage, so the impact a payday loan will have on your rating depends on how good it is at the present moment.
For those with a poor rating it can't do any extra harm, but it can help you rebuild.
Defaults Will Be Recorded
If you fail to make a few repayments or refuse to pay altogether this will be reflected on your credit score and you could find it harder to obtain credit in the future.
The only saving grace is that in general payday loan companies tend not to report to the major credit bureaus, so if a future lender is checking your reports from Equifax, Experian or Trans Union, they may not notice.
This however goes both ways, so any positive you get from paying off your payday loan on time may not register with the big bureaus either.
If you ignore the debt for so long that it gets passed on to a debt collection agency, they then may decide to pass the information on to the big 3, so you could still get the full negative impact on your score.
Generally as long as you pay off your payday loan on the agreed upon date you will not experience any major impact on your credit rating - good or bad.
If you're already in a bad state, the positives may outweigh any negatives. If however you have a medium to great credit rating it could put off some high profile lenders like mortgage providers.