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Do Payday Loans Affect My Credit History?

A good credit history opens up access to the most profitable transactions with financial institutions aimed at a comprehensive analysis of solvency. If the borrower applies to the bank, the reputation must be perfect. Many consumers wonder how payday loans affect credit history. In this article, we will answer all the questions that may interest borrowers.

What is a credit history?

Credit history is the history of a person’s payments, his or her financial reputation. The United States is a country of immigrants, so credit history serves as an indicator of how solvent a person is and whether he or she can be trusted. Credit history is needed when buying real estate, a car, taking out insurance, concluding a lease, and so on. Sometimes it is reviewed by the employer when applying for a job.

Credit report is data about a person’s credit history from various sources. It is important to systematically review your credit report to ensure that all information provided on it is accurate and up-to-date. You also need to ensure that no fraudulent accounts are opened in your name.

What is my credit score?

The information provided in the credit report is used to determine the credit score. This is a three-digit number ranging from 300 to 850. Typically, a rating of 700 or more is considered good.

Credit score FAQs

  • What is considered a good credit score? Generally, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent;
  • What is the highest credit score possible? The highest credit score you can have on the most widely used scales is 850;
  • What is the lowest credit score? For FICO, the lowest credit score range is 300 to 579;
  • What credit score is needed to buy a house? Usually, your credit score for a home loan must be 760 or higher;
  • What credit score is needed to buy a car? In general, you will need a score of 661 or higher to qualify for most conventional car loans;
  • What credit score do you start with? Most in the U.S. start at 300, and sometimes lower, depending on the scoring system — so you can’t have a credit score of zero;
  • How long does it take for your credit score to go up? It could take anywhere from 1 month to 10 years to improve your credit score, depending on your situation;
  • What are the 3 main credit bureaus? These agencies include Equifax, Experian, and TransUnion.

What affects your credit score?

Many consumers ask a question: “Why did my credit score drop?” There are several reasons for this:

  • Percentage of credit card money you use. For effective rating growth, you’d better use between 1% and 20% of the total credit card limit. Using 21% to 40% is slightly worse. If you don’t use a credit card or spend between 41% and 60%, it’s even worse. Using more than 60% is a disaster. Let’s say you have a credit card limit of $500. For the best rating, you need to spend from $5 to $100 per month;
  • History of loan payments. Pay off all loan payments on time or at least make the minimum contribution. Avoid late payments! If you delay payment for 30 days, such a payment will be displayed in your history for up to 7 years, and all this time it will be a stain on your reputation;
  • Age of your credit history. To calculate the age of your credit history, take all credit accounts and calculate their average age. So don’t close your first credit card! If you close it, your history will be shortened exactly as long as it took until the moment you opened the second credit card;
  • Loan inquiries. Credit requests appear in history when someone looks at your credit report. These queries can be “hard” or “light”. “Light” inquiries are initiated by lenders who want to understand the attitude of the credit market towards you. For example, when you want to connect electricity, rent a mobile phone or change your provider. They initiate “hard” requests at the time of applying for a loan (a mortgage, a car loan or an education loan) or a credit card. The more “hard” queries you have, the worse;
  • Number of credit accounts. The more credit accounts you have, the better. But keep in mind the previous point and increase the number of accounts gradually! Do not apply for a new loan every month, as the credit bureau will regard you as an unreliable client and, as a result, lower your credit score.

Important: When issuing a loan, the lender takes into account not only your credit score but also other factors. So, for example, your score may be perfect, but the income level is low. Under such circumstances, a loan may have a high interest rate.

What kind of data do the credit bureaus include in your reports?

  1. Personal information: your first and last name , contact information (email address, postal address, phone number, etc.), Social Security number, date of birth, etc.;
  2. Account information: the types of accounts you have, the dates those accounts were opened, your credit limit, account balances, payment history and more;
  3. Collections: unpaid accounts that have been passed on to a collections agency;
  4. Inquiries: such as when you applied for a credit card or any type of loan.

Do payday loans show up on credit report?

A payday loan is an unsecured, short-term loan for a small amount — typically $100-$1,000 — that’s meant to be repaid with the borrower’s next paycheck.  Timely repaid payday loans make it possible to improve your financial situation quickly. It is recommended to contact the payday lender in case of unforeseen problems with solvency due to force majeure circumstances.

Important! A loan is a publicly available form of borrowing. If you urgently need to solve your money issues, applying to a payday loan will be the right decision. Such a loan can also improve or lower your credit score.

Microfinance organizations cooperate with the credit bureau in the following way:

  1. An agreement is concluded between the client and the lender;
  2. Information about the transaction is transmitted to the credit bureau;
  3. The credit bureau replenishes its database and stores the received information;
  4. The credit bureau generates reports on the applications approved;
  5. Lenders request information about potential clients.

Lenders can simultaneously involve several credit bureaus for cooperation. Information about customer actions is transferred to the database within five business days from the date of the financial transaction.

How payday loans affect your credit

Payday loans, like any other loans, can improve or worsen the reputation of the borrower. As soon as the application is approved or rejected, a new record appears in the credit bureau database. If the client fulfills the obligations on time, the credit score will increase. Otherwise, cooperation with payday lenders will negatively affect the financial reputation.

How payday loans help build credit

Microfinance organizations are promoting their products as a tool to improve the damaged reputation of a borrower. Subject to responsible fulfillment of obligations, the client will indeed receive a real opportunity to increase the credit score.

To correct the credit history with the help of payday loans, you will have to submit an application to the lender for a small amount. As soon as you repay the loan in a timely manner, the borrower’s reputation improves and the chances of concluding profitable transactions with credit institutions increase.

Important! Payday loans will allow you to build a credit score from scratch. Banks sometimes reject applications from consumers with a “clean” credit history.

By contacting a short-term lender, you will be able to get the first note on credit obligations.

How payday loans can hurt your credit score

In order to avoid additional problems with reputation, it is not recommended to borrow amounts that cannot be returned within the period specified in the contract. If you default on your loan, your credit history will worsen.

Borrower risks:

  1. Missed payments will negatively affect your credit score;
  2. Simultaneous cooperation with several payday lenders will create the impression of financial difficulties for the borrower;
  3. Regularly seeking help from non-bank credit companies will indicate problems with solvency.

Important! The borrower’s credit score will lower not only in the case of late payments. Reputation problems will also arise when you apply for multiple loans at the same time in different organizations.

Do late payments affect credit score?

If the borrower accidentally or deliberately made a delay in payment, information about it will go to the credit bureau. Late payments have a negative impact on financial capabilities and can sometimes reduce the quality of the borrower’s life.

What happens if you don’t pay a payday loan back on time:

  • Deterioration of the borrower’s credit history and current credit score;
  • Reduced likelihood of approval of applications for new loans (especially in banks);
  • Tightening of credit conditions, for example, raising interest rates;
  • Rapid growth in the amount of debt due to the accrual of fines and penalties;
  • Litigation, as a result of which the debtor risks losing property;
  • Engaging collectors or bailiffs to enforce debt collection;
  • A ban on traveling abroad.

It is impossible to delete information about previously admitted overdue payments. The bureau stores all the data of a particular borrower for up to 7 years from the date of the last financial transaction. It will be possible to correct the reputation only through the receipt and repayment of new loans.

Can I avoid credit bureaus?

Microfinance organizations undertake to transfer information within five working days from the moment of the occurrence of the event, which must be noted in the borrower’s dossier. Data exchange between the credit bureau and the payday lender is carried out electronically.

To avoid late payments, experts recommend that you:

  1. carefully study the terms of the contract;
  2. find out the deadline for making the payment;
  3. clarify the current amount of debt;
  4. repay the loan a few days before the deadline;
  5. use an extension option in case of problems.

The data on late payments will in any case affect the credit score. To avoid this, you will have to fulfill obligations in a timely manner.

How to improve credit score

A borrower’s delinquency affects the credit score from the day following the deadline for payment of the debt. Given the maximum data transfer time, the information received will be reflected in the credit bureau database after about one week. The depth of delinquency affects the time it takes to fix your credit score.

Taking into account the current credit score, the borrower can choose the best way to improve the reputation. In any case, you will have to carefully use loans in order to prevent a worsening of the financial situation. With proper planning, the credit score can be restored in three stages.

Step 1: Check your credit history

The information in the credit bureau database is updated within several days from the date of the last changes. How long does it take to improve your credit score? It depends on the depth of delay and violations that were committed in the past. To find the best option for improving your reputation, you will have to check your credit dossier.

How to find out your credit score:

You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax, Experian, and TransUnion – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228.

Step 2: Choose the best loan program

Having learned your scoring score, you can start selecting loan products. Choose the one which will increase your credit score. At this stage, you should find a lender with acceptable conditions for cooperation.

How to increase your credit score: 2 options:

  • Take out a payday loan. Timely repayment will allow you to quickly fix your damaged reputation. As soon as you repay your loan on time, you can apply for another loan and also repay it on time;
  • Take out a personal loan for up to six months. Monthly repayment will allow you to prove your responsibility and discipline.

Step 3: Repay your loan on time

It is recommended that you choose the shortest loan term or a loan product with the most favorable terms and rates. The procedure for getting a loan is no different from getting a regular personal loan for urgent or household needs.

How to increase your credit score with payday loans

The proper use of payday loans will increase loyalty to a borrower with a damaged reputation. Each transaction will be displayed in the credit report, so fast online loans should be used with short breaks. In addition, the simultaneous conclusion of credit transactions in several companies will raise suspicions.

The scheme for improving credit history using payday loans:

  1. Choose a microfinance organization with acceptable rates and terms. If you are not sure which lender to choose, use our referral service in order to get connected to the best lender for your case;
  2. Repay a loan in a timely manner;
  3. Borrow a larger amount of money and repay it on time.

Important! In order to improve your credit score, you can take out several loans one after the other. Timely fulfillment of obligations will allow you to build your credit history. A noticeable improvement in the credit score according to this scheme will be traced after at least three deals are closed.

How to get a good credit score: borrower tips

  • You need to fulfill your loan obligations on time without breaking the schedule;
  • Take a break of at least six months between loans;
  • Do not take out multiple loans at the same time;
  • Loan payment must not exceed 40% of monthly income.

Important! Credit history is improved not by the fact of obtaining a loan but by information about timely payments. It will be possible to increase the scoring rating thanks to the competent design and conscientious repayment of loans. To do this, you should choose loan products within your financial capabilities.