So, the long and short of this question, is yes and no. Understanding how payday loans affect or don’t affect a person’s credit score is a question that we get often from customers. Which would make sense, since pretty much every other loan has some sort of impact on your credit. Even checking your credit score can affect your credit. So, what can you expect to see happen to your score after acquiring a payday loan? We’ve got the details.
Payday lenders don’t pull credit history
First off, most payday lenders don’t run the applicant’s credit history. This is one of the benefits for the consumer that is applying for a short-term loan. Why is this? Well, to be honest, most consumers that are applying for a payday loan are doing so because they are unable to obtain financial aid by means of a credit card or some other sort of loan. In lieu of pulling credit history and evaluating, lenders review other information to underwrite applicants. This information can be proof of income, reviewing applicant’s bank history, and/or consumer reports.
Since most lenders aren’t running credit as a decision factor during the underwriting process, they are also, most-likely, not reporting payment history to the credit bureaus either. So, if you are looking for a way to increase your credit score, this is not the best way, as your good payment history will not show up on your record. (Stay tuned for next week’s blog on how some solutions to improve your credit score). Unless you can verify that the loan company you are applying with runs a credit check during approval and/or reports payment history to credit bureaus all of this positive transaction history will not show up on your credit report, thus not having an affect on your score. Call the customer service line of the lender you are looking to apply with to confirm their reporting policy.
Missed payments can affect your credit score
With all of that said, customers that are funded a loan and have fallen behind on payments or failed to make a payment will become a defaulted loan. When a loan is defaulted, collection activity begins. Burying your head in the sand over a missed payment or loan that is past due will not make it go away, quite the opposite. Defaulted short-term loans can acquire additional fees on top of the original loan fees. Our best advice is to be honest and upfront with the company as they will be more likely to work with you to get your balance resolved.
If a loan remains unpaid for 30 days, then the loan company can report the poor payment behavior to a credit company which could negatively impact your credit score. The loan company can also employ the help of a third-party collection agency which takes over the past-due account and begins reporting to credit bureaus. Again, this will negatively affect your credit score and continue to do so unless payment is made to settle the past due balance.