Do payday loans affect credit score? The quick answer is yes. Payday loans affect credit score if you do not pay back your loan and the loan goes to a collection agency. It is important to note that taking out a payday loan and paying it back on time will NOT help your credit score.
To better understand this relationship between payday loans and your credit score we’ll look at what is a credit score and how it’s calculated. Your credit score is basically a score modeled to predict your likelihood of paying back what you borrow.
There are three major credit bureaus that model credit scores: Equifax, TransUnion, and Experian. They model your credit scores using data submitted to them by lenders and creditors with whom you have accounts such as banks and credit card companies. Each credit bureau has their own modeling technique but in general they look at 24 months of your credit behavior to determine a score. They then furnish this score to entities with whom you’ve given permission when you are applying for credit such as credit card companies, banks, landlords, and insurance companies.
The reason payday loans cannot improve your credit score is that payday lenders do not report to the three major credit bureaus. According to Maxine Sweet, Vice President of Public Education at Experian, “Experian does not currently receive payday loans from lenders. Payday loans are not typically included in credit reports…” This means that when you payoff a payday loan on time no one knows about it so it cannot positively affect your credit file.
The reason payday loans can negatively affect credit scores is because if you do not pay your loan off on time a payday loan company may sell your loan to a collection agency. And according to Ms. Sweet, “most collection agencies do report their accounts to all three of the credit reporting companies.” This means that your failure to pay off a loan does get reported and can hurt your credit file. To be clear the only way a payday loan can affect credit scores, as of the writing of this article, is if you do not pay it off on time. Just the act of taking out a payday loan will not affect credit scores as this behavior is not reported.
Payday loans are a last choice option for emergency cash. They are not a tool for rebuilding credit. More importantly, if not repaid, payday loans may hurt your credit. If you have bad credit and are looking to build your credit we recommend secured credit cards. They are available to individuals with no or bad credit and they do build credit by reporting to the three major bureaus. To learn more visit What is a Secured Card and The Best Secured Cards.