Many people who are needing money to help them out are choosing to actively avoid payday loans because they believe that in taking out one, they are going to severely damage their credit score.
But, in actual fact, simply taking out a payday loan and respecting the agreement will not damage your credit score in the slightest. However, there are exceptions to this if a particular company you deal with in the future for financial credit sees payday loans in a negative light. In this case, having one on your credit score could go against you, even if you made all the repayments on time etc.
Can payday loans increase your credit score?
In some cases, you may find that if you take out a payday loan and the full amount plus interest pay on time, it can help your credit score because the information is sent to credit reference agencies and shows that you can make payments on time. If you do not see an increase in your credit score and you have never put a foot wrong, you can just rest assured that your credit score remains undamaged in any way. However, you may be lucky enough to see an improvement.
Why might a payday loan damage your credit score?
The only case where a payday loan can negatively affect your credit score is if you do not pay back the full amount on time or you fail to meet the repayment requirements entirely.
Obviously, you will want to avoid this as having a poor credit score can seriously damage your chances of getting financial help elsewhere including, a mortgage or a credit card.
Your credit score is not the only think you have to worry about when it comes to taking out a payday loan and not respecting the agreement. You may find yourself trapped in a cycle of debt. For example, you may borrow money because you are short of it, then end up being short of it again because you are paying back the loan plus the interest.
If you do not pay back your loan, yes, your credit score may be negatively affected, but you will also likely be hit with a fee for late repayment. These fees have been capped by the FCA at £15 plus interest on the amount you owe.
Does a payday loan make you less eligible for future credit?
Not as a rule. Simply taking out a payday loan and following the agreement will not have any effect on being able to obtain credit in the future in most cases.
It is, however, up to any future providers whether they choose to make it a problem that you ever took out a payday loan. For example, a mortgage provider or credit card company may deem having a payday loan your record as an indicator that you are irresponsible with money. You may be seen as a risk if you have relied on payday loans in the past. Some companies may work on this philosophy, but let it slip if you took the loan out a long time ago as your finical situation could have massively changed by then, which should be backed up by your current income.
Other companies offering credit will not see it a problem that you have taken out a payday loan in the past. If you are looking for credit now but have taken payday loans out in the past, maybe so some research into companies which do not mind that you may have this present on your credit file.
It must be stressed that just taking a payday loan out should actually affect the score on your credit file, it is how you treat the payday loan agreement.