Payday and other short term loans are typically not the first choices when borrowing. People 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 not unusual to worry about the potential impact of taking out this type of loan on your credit score.
However, if you’re planning to get a short term loan, it’s worth knowing that different lenders view your credit history in different ways. Lenders 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 a single “credit score”.
Will a payday loan application appear on my credit file?
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 where payday and short term instalment loans can either help or harm your credit score.
Can payday loans improve my credit score?
This is up to you. 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 be reported back to CRAs. As a result, this boosts your credit score and your chances of getting another loan in the future. Credit repayments also stay on your file permanently.
Can payday loans hurt my chances of getting loans in the future?
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. It’s normal for this search to have a slightly 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 see how much you applied for, when and from what source.
Making multiple payday loan applications in a short time will have a significantly negative effect on your credit score. It’s a strong indicator of irresponsible borrowing or severe financial difficulties. 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 likely reduces 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 will be reported back to credit reference agencies and have a significant, lasting negative impact on your credit score.
Unfortunately, it’s 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 a red flag.
Example: Mary, James and the different effects of payday loans on their credit score
Mary and James are a couple considering applying jointly for a car finance deal. They check their credit files to see how likely they are to be approved for a big loan.
Mary took out a payday loan 5 years ago but made every repayment on time. This had a positive impact on her overall credit score.
James took out a payday loan 2 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.
* This is a fictional, but realistic, example.
How to improve your credit score
Don’t take out too many loans. Once you repay a payday loan, it may tempt you to take out another one. However, taking out several loans for small amounts can be a sign to prospective lenders that you’re not in a stable financial position. It doesn’t matter if you repay the loans on time. The fact that you need to take out so many loans is not a good sign to lenders.
Make your repayments on time. As mentioned earlier, your repayment history appears on your credit file, which makes it more critical to make your repayments on time. CRAs will record any payments you miss or are late paying on your file. Lenders that look at your file can see this for a number of years.
Don’t make multiple loan applications in a short time. As well as taking out too many loans, you should avoid making too many requests within a short period. All applications show on your credit file. Lenders can get a good idea of whether you were approved for loans based on your applications and how many accounts were opened. Making several requests may indicate that your finances aren’t in good standing.
Regularly check your credit file. When making loan applications online, it helps to stay familiar with your credit file and also watch for identity theft. Check that the records company lists the loan correctly and see what your current financial situation looks like to lenders that review your file.
Bottom line
Taking out a payday loan doesn’t need to have a negative impact on your credit score. However, you should keep the following in mind when deciding whether it’s worth taking out a short term loan:
Having payday loans in your credit file can be perceived differently by different lenders.
Make your repayments on time. Any negative impact on your credit score is likely minimal and short lived. By showing you can borrow responsibly, you’re more likely to improve your score.
Missing any repayments severely damages your credit score. This will make it harder to secure credit for a number of years.
Some lenders might be put off by seeing payday loans in your credit history, even if they were properly paid off.
Frequently asked questions
Banks will consider your application both through individual in house assessments and information requested from a CRA. While it’s possible that a lender could be put off by a payday loan in your credit file, it’s less likely to be an issue if no payments were missed.
Making multiple payday loan applications is a big mistake, as is missing repayments or defaulting on your loans. In many cases, it’s best to wait and build your credit score before making another credit application if you’ve recently made any of these mistakes.
Read about how different factors can affect your score
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
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Learn the facts about loan applications and your credit score plus what you can do to minimise the impact.
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