Do payday loans damage your credit rating?

Dear James,

I was wondering if you would please be able to tell me what effect taking a payday loan would have on my credit rating? I know that if I maintain repayments then it shouldn't be a problem, but I understand these loans are viewed as sub prime and I therefore wondered if to other lenders it reflects badly on my credit file for having this type of loan?

Joanna, London

Dear Joanna,

If you repay the payday loan on time and in full then any effect on your credit rating could be positive. When lenders check your credit report they are looking for evidence that you are a responsible borrower. Repaying a payday loan on time and in full should therefore strengthen your case, because many payday and other short-term loan providers are now sharing customer records with Experian. Saying that, some lenders might see the fact that you’ve taken out a payday loan as a sign that your finances are under pressure. Importantly, lenders’ scoring systems are built by modelling actual customer data. As a result, if a particular lender’s experience is that customers who take out payday loans are more likely to miss their repayments, this will be reflected in their credit scoring. Actually, some of the lenders that use Experian for credit checks don’t currently differentiate between payday and other types of loans, so they wouldn’t be able to discriminate anyway. So if you do take out a payday loan, just concentrate on paying it back on time and you shouldn’t hopefully have any problems. (November 2012)

(You might also want to read our more recent Q&A: Will past payday loans stop me getting a mortgage?)

James
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