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Payday and other short-term loans are typically not the first choice when it comes to borrowing. People generally turn to them if they have a bad credit history or need a quick finance boost and can’t get a loan elsewhere. It’s therefore not unusual to worry about the potential impact on your credit record from taking out this type of loan.
If you’re planning on getting a short-term loan, it’s worth knowing that different lenders will view your credit history differently. Lenders normally make a decision on your application for credit based on their own in-house assessment plus a credit search through a credit reference agency (CRA). There are a handful of separate but widely-used CRAs in the UK, so as an individual, you don’t have one single “credit score”.
In short, yes. A payday loan will always impact your credit record in some way. Your credit file is a record of your borrowing history, so all applications for credit and all repayments will appear there. It’s normal for lenders to run an “application” search, also known as a “hard” search, before offering you a loan. That search will be logged on your credit file for 1-2 years, depending on the CRA.
However, some actions will hurt your file more than others. Some can even help to boost your credit score.
Below, we explain the scenarios in which your credit score can be helped or harmed by payday and short-term instalment loans.
This is down to you. In order to build a positive credit score, you need to show evidence of paying back loans on time.
If you don’t miss a repayment on your payday or short-term instalment loan, you’ll clear it in full and on schedule. This will normally be reported back to CRAs. As a result, this can actually boost your credit score – and therefore your chances of getting another loan in the future. What’s more, credit repayments stay on your file permanently.
The act of applying for credit can have an adverse impact. That’s because any responsible lender should run a “hard” search on your credit history before offering you a loan, and it’s normal for this search to have a slight negative impact on your credit score.
For most of us that’s unavoidable, but provided you then go on to pay off the loan on schedule, that negative impact will be minimal and short-lived. Lenders will be able to see how much you applied for, when and from what source.
Making multiple payday loan applications in a short space of time will almost certainly have a significant negative effect on your credit score, and is a strong indicator of irresponsible borrowing or severe financial difficulties. That means it could seriously harm your chances of being approved for another loan in the future.
Prospective lenders will also want to see how much debt you already have, and how much credit you have access to. If you currently owe money to payday lenders, this is likely to reduce the amount that a lender would be willing to offer you.
Missing a repayment on these loans is an even stronger indicator of irresponsible borrowing. It’ll be reported back to credit reference agencies and have a significant, lasting negative impact on your credit score.
Unfortunately, it is also possible that some lenders could simply be put off by seeing a payday loan in your credit history, even if it was paid back in full and without delay. Regular use of payday loans is more likely to be a red flag.
Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
Mary took out a payday loan five years ago, but made every repayment on time. This had a positive impact on her overall credit score.
James took out a payday loan two months ago and missed his first repayment. This had a disastrous impact on his credit score.
The couple decided that Mary would be better off applying on her own, with James transferring the cash to her.
Taking out a payday loan may be a quick decision you make to cover some emergency expense, but don’t let the ease of the application process lead you into committing any of these common mistakes:
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