How payday loans and other short-term loans can influence your credit score
Payday loans are a fast way to receive cash for unexpected costs and emergencies. Whether you need to pay a medical bill or cover a car repair, a payday loan can quickly provide you with the funds. But those seeking a payday loan may wonder what effect it can have on their credit score.
Most payday loans have little to no effect on your credit score. Let’s look at why this is the case and why it may not be true for other short-term loans.
Will a payday loan hurt my credit score?
No, the type of credit checks payday lenders use will not harm your credit.
Payday lenders do not run hard credit checks. A hard credit check is when the lender asks to view your borrowing history before extending a loan. These types of credit checks are common with mortgages, student loans, or applications for other major lines of credit.
Your credit information is requested from one of three national credit bureaus: Equifax, TransUnion, and Equifax. If a lender performs a hard pull with one of these agencies, your credit is usually affected. These checks appear on your credit report and may harm your credit score.
A soft credit check is not the same as a hard credit check. A soft credit check is an overview of your background information and credit score. It is not reported to any one of the major credit bureaus and does not show up on your credit history. A soft credit check is what cash advance lenders use in the loan application process.
Additionally, according to GreenStarCash, payday lenders usually do not report loans to major credit bureaus. Therefore, your credit score and borrowing history should not be affected when you take a payday loan.
Could a payday loan help build my credit?
Payday loans typically don’t help to build your credit or improve your credit score. Your credit score is a result of your past borrowing habits and how diligently you repay your loans.
The successful repayment of your loan is not reported to any credit bureau. Therefore, your ability to remit payment on time doesn’t have an effect on your borrowing history or credit score.
Can failing to repay a payday loan influence my credit?
Even though successfully repaying a cash advance loan won’t influence your credit, failing to repay your loan might.
If the lender decides to have a debt collector take over your loan, either by selling your loan or transferring it to a collector, your credit could be impacted. The debt collector has the option to report your outstanding loan to one of the major credit bureaus. If your loan reaches debt collections and appears on your borrowing history, your credit score may take a hit.
Alternatively, the lender could decide to file a lawsuit against you if you fail to repay your loan. Depending on the outcome of the court case, the loan and your inability to repay it could show up on your borrowing history. As a result, your credit score would be negatively influenced.
Do other short-term loans affect credit?
In general, payday loans influence your credit far less than other short-term loans.
Secured Loans. Short-term loans like secured loans typically require you to have good credit as they are issued by a financial institution. The bank, or institution, will check your credit as part of the application process. The loan and your payment ability will be reported as part of your borrowing history. These types of loans have a significant influence on your credit.
Unsecured Loans. Unsecured loans are very similar to secured loans in their role on credit. Your credit score will be referenced and the loan will be reported to the national credit bureaus. Both of these loans can help you build credit, but they can also harm your credit if you aren’t careful.
Loans with Collateral. Alternative short-term loan options, like a title loan or pawn shop loan, generally don’t affect your credit. These loans use collateral to back the loan. The lenders usually don’t check your credit score or borrowing history with hard credit checks. Additionally, they don’t report the loan to the major credit bureaus. Therefore, these types of short-term loans have little to no influence on your credit.
Credit Options. Obviously, using a credit advance or credit card as a short-term loan method will affect your credit. This is considered a major line of credit and your financial history will be checked before approval. Repayment and delinquency will appear on your credit report and could negatively impact your score.
Which short-term loan is best?
The loan type you choose should suit your needs and your financial standing. For those who need cash fast and either have bad credit or don’t want a loan to influence their credit, things like payday loans or title loans can be a good choice. If you are looking to build your credit you would likely prefer a short-term personal loan from a bank or financial institution that can directly impact your credit and borrowing history.