How do payday loans affect your credit score?

A common question posed is whether simply taking out a payday loan can have an effect on your credit score, either positively or negatively. If you have worked hard to maintain a good credit score by building up your finances and paying off your credit card bill in full each monthly statement, it makes sense that you would want to protect your credit score.

After all, having a poor credit score can seriously damage your chances of getting financial help in the future. This could include taking out a mortgage, buying a car with a loan or even getting an overdraft and a credit card.




But, does just taking out a payday loan affect your credit score in any way? Payday bad credit investigates.

Do lenders check your credit rating?

Ever since the Financial Conduct Authority took over the payday loans industry in 2014, the credit providers who assess your application will almost always check your credit score. Contrary to popular belief, this should not affect your credit score if it is a soft search, which we will discuss later. If it is a hard search it will leave a search footprint on your credit file, and having one of these shouldn’t affect your credit score in any way.

Soft Search Footprint

A soft search refers to a lender looking at an applicant’s credit score. These do not leave a long-term mark on their file, or have any impact on their credit score. Soft searches are common practice for comparison websites that deal with insurance and loans. For guarantor loans, it is typical for a soft search to be carried out on the guarantor rather than the main applicant as they need to have a better credit score. The guarantor is doing someone else a favour, so to have is vanish soon after is a fair system.

Hard Search Footprint

In contrast, a hard search footprint is one which stays on the file belonging to the applicant for around 12 months. It is common for applicants for mainstream finance such as mortgages, credit cards and loans. Having too many of these on your file can result in your credit score being damaged.

Therefore, the application process can have implications on your credit score, especially if you make too many applications to a variety of lenders.

What could a payday loan indicate?

Short-term solutions such as payday loans are usually used by people that are in need of an emergency lump sum of money. Therefore, short-term credit can be seen as a desperate measure and some lenders may take this as a sign that you are prone to falling into financial trouble. You may be viewed as someone who is bad at managing their personal finances. This may mean that any future credit may come with a higher rate of interest to mitigate the perceived risk you pose.

Will a payday have an effect on my credit rating?


To be quite frank, your credit rating is rather complex and can be more complicated than simply ‘good’ or ‘bad’. The rating will be based on your personal history and your own financial experiences.

You may have a poor credit score because you have actually never been in debt. This is common with younger applicants who have never had a loan or a credit card, and therefore have no way of proving their credit-worthiness.

On the flip side, you may see an improvement in your credit rating if you’re only making minimum payments. Normally, this is not advised as you should pay everything back in full for a great credit score, but if it is already poor – this is an improvement at least.

But overall, it is true that the impact of a loan on your credit score could be positive or negative. Any missed payments are recorded and will help to contribute towards your credit rating status in lowering it. Missed payments are, in fact, the biggest negative impact on a person’s credit rating as this reflects very badly on your credit-worthiness.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.