Do Payday Loans Affect Your Credit?
Do payday loans affect your credit? You might be wondering this if your payday loan is due and you can’t repay it.
Or you might be in the opposite situation: you’re trying to improve your credit score, and you’re hoping that if you borrow and repay a payday loan on time, it will help.
You might even be wondering if you should get a payday loan to improve your credit score. So let’s talk about the relationship between these short-term loans and your credit score.
Do Payday Loans Go on Your Credit Report?
Payday lenders do not report their customers’ payment history to Experian, Equifax, or Transunion. These are the three major credit bureaus that keep credit reports on consumers.
Banks, credit unions, and credit card issuers check these reports when deciding whether to let you take out an auto loan, get a mortgage, or open a credit card account. Private student loan companies and personal loan companies also check these reports.
In 2016, the Obama administration proposed several changes to payday loan regulations to make payday loans a more consumer-friendly financial product. One proposed change was to require payday lenders to report loan information to the three major credit bureaus. But this change has not been implemented.
Still, payday loans can end up on your credit report indirectly if you never repay them. How?
Payday Loans and Debt Collectors
The lender can send your account to collections, and the collection agency can report your account to the credit bureaus. Further, if you don’t pay a debt that’s gone to collections and the debt collector wins a judgment against you, that judgment can show up on your credit report. Negative items like these will remain on your credit report for seven years.
Both collections and judgments are bad news for your credit score. A debt settlement on an account that’s gone to collections isn’t great, either: it shows that you didn’t repay everything you owed.
However, these are worst-case scenarios, and payday lenders usually try to collect payment from you themselves before selling your debt to a collection agency.
Do Payday Lenders Check Your Credit?
While payday lenders don’t report your payment activity to the three major credit bureaus, they might check with those companies to see what’s in your credit file before they let you borrow.
For example, ACE Cash Express, a major payday lender, makes this clear on its website. One FAQ answer says, “Our credit decision on your application may be based in whole or in part on information obtained from a national database including, but not limited to, TransUnion, Equifax, LexisNexis or FactorTrust, Inc.”
According to the Consumer Financial Protection Bureau, a federal government agency tasked with overseeing financial service providers and helping Americans become wiser users of financial products, a more common practice among payday lenders is to check with a specialty credit reporting firm to see if you have previously defaulted on a loan. One such firm is CoreLogic, which offers a credit reporting service called Teletrack.
Beyond the Big Three: Short-Term Credit Reporting Agencies
Along with payday lenders, companies that may report to Teletrack include rent-to-own companies, auto finance, and leasing companies, cable companies, furniture stores that offer financing, and companies that offer short-term loans or payday cash advances.
As a consumer, you can see what’s in your Teletrack report by submitting a signed form and a photocopy of your driver’s license by mail to Corelogic. If you find any mistakes in your report, you should call Corelogic Teletrack and request that they investigate it.
FactorTrust is similar. It’s a consumer reporting agency owned by TransUnion, one of the major providers of traditional credit reports, but it’s specifically for consumers who use short-term credit. You can request a copy of your report online, by mail, or by fax.
Payday Loan Requirements
Payday lenders require borrowers to have personal identification, proof of income, and a bank account. They may also require a personal check or an electronic debit authorization when you take out a payday loan.
The lender will cash your check or withdraw what you owe from your bank account on the due date. Some payday lenders may require you to return to the store and repay the loan in cash.
If you can’t repay the loan, you can roll it over into a new loan. But this can get expensive, and the fees from repeated borrowing can make it hard to get out of debt.
Since payday lenders don’t tend to check traditional credit reports, you might get approved for a payday loan even if your traditional credit score is low. According to one academic study published in 2015 in the Journal of Money, Credit and Banking, the average payday loan applicant has a credit score in the low 500s.
Do Payday Loans Affect Your Credit?
No one likes to think they’re average, but payday loans typically don’t affect borrowers’ credit scores. It’s possible that a payday loan could affect your credit score indirectly if it helps you pay other bills on time that are reported to credit bureaus.
A payday loan could also hurt your credit if you don’t pay it back or if paying the fees makes it harder for you to meet your other financial obligations. Unpaid payday loans can also hurt your credit.
Payday loans can be expensive, especially if you don’t repay them right away. They can be less costly in the short term than bank overdraft fees, having your utilities cut off, or missing work because your car broke down.
But if you held on to a payday loan for an entire year, your interest rate would be in the triple digits, maybe as high as 600 percent. That’s about 20 times higher than the highest credit card interest rates.
Some borrowers who think they will get a payday loan “just this once” end up stuck in an expensive cycle of borrowing that can be hard to get out of. That’s why you should consider your options carefully before taking one out. And make sure you understand the loan terms, especially the fees, before agreeing to a payday loan.
Payday loans are an option for borrowing money in the short term when you have no credit. Payday lenders don’t usually check your credit score from Equifax, Experian, or TransUnion, so it doesn’t matter if you have no credit score or bad credit with these credit bureaus.
Instead, payday lenders might use a service called Teletrack or FactorTrust to make sure you haven’t defaulted on a previous payday loan or another short-term loan.
Payday loans are mainly based on your income. If you can prove that you’ll be able to repay the loan you’re requesting as soon as you get your next paycheck, there’s a good chance you’ll get approved.
If you’re hoping to establish credit, however, a payday loan is not the way to go. Payday lenders will not notify the three major credit bureaus that you’ve made good on repaying your loan. The big three credit bureaus that are so important to get approved for traditional credit will only find out about your payday loan if you don’t repay it for so long that it goes to collections, and that can really hurt your credit score.
Look to other financial products and services, such as credit cards, auto loans, personal loans, and other types of loans from companies that do report to the three major credit bureaus if your goal is to establish a credit history or improve your credit.