What Are Payday Loans?
Payday Loans are short-term loans, usually in small amounts that normally need to be repaid in full at the end of the term of the loan or when the loan becomes due. This means that there are no weekly or monthly installments that need to be paid. Only one repayment that includes interest and other charges. This is an important factor in determining if payday loans hurt your credit.
Commonly, the amount is due when your next salary, wages or other form of income is paid. The term of the loan can therefore range anywhere from a few days to 31 days. It is rare to find a payday loan that will have a term longer than 31 days.
What Is A Credit Score?
Your credit record is a reflection of all the debt that you have accumulated. It keeps a record of both current debts and past debts. Your credit score is calculated relevant to how you service this recorded debt. In other words, if you pay your debt on time, making the full installment on a regular basis, you will have a good credit score.
If you pay late, make irregular payments or don’t pay at all, this negatively impacts your credit score. To protect your credit score from these penalties, it is important to ensure that you can afford the repayments when they are due and not take on credit or loans that you cannot afford.
How Do Payday Loans Affect Your Credit Score?
Payday loans actually have very little effect on your credit record – either good or bad. There are a couple of reasons for this.
Firstly, most payday loan providers do not run a credit check in order to approve the loan. They also do not register the loan with any of the relevant credit agencies or bureaus. This means that they are never recorded as part of your credit history and can therefore not affect your credit score in any way. However, it is recommended to find out from your loan provider whether they do use credit bureaus to track credit transactions or not and whether they will run a credit check.
Secondly, payday loans only have one repayment. Remember that your credit score is calculated according to how regularly payments are made. When there is just one repayment, like with a payday loan, then this repayment has little to no impact on your overall credit score.
Do Payday Loans Hurt Your Credit?
The answer is no. Payday loans cannot hurt your credit score or record.
However, this does not mean that you can take out a payday loan and not repay it without any consequences. Non-payment of a payday loan will result in additional charges as well as a hike in interest. This means the loan will keep costing you more and more.
A loan provider may go as far as taking you to court and reporting the non-payment of the debt with the various credit bureaus. This can have a severe negative impact on your credit score and may even result in blacklisting.
Why Is It Important To Protect Your Credit Score?
Every time you apply for a loan or credit facility, the loan or credit provider will check your credit rating. A bad credit rating will make it difficult or impossible to get approval for loans or credit.
Employers also check credit history to better assess the character of potential candidates for a position in their company. If you have bad credit, it will not reflect well.
Landlords check credit records in order to determine how likely it is that a new tenant will pay their rent in full and on time. A bad credit rating can prevent you from leasing a home.