Did you know that almost a third of Americans have credit scores less than 601?
Building credit can be vital for securing your financial future. Consumers need healthy credit scores to apply for personal loans and lines of credit at reasonable rates.
Luckily, if you are new to the world of credit–or need to recover from bad credit–there are plenty of ways to build those numbers. These include responsibly borrowing funds from an approved lender.
You may have heard about payday loans, a short-term loan available to individuals with bad or nonexistent credit. Do payday loans help your credit score?
Keep reading to learn more about how payday loans affect your credit!
What Are Payday Loans?
Payday loans are short-term personal loans available to consumers. They are designed to help individuals navigate the gap between paychecks.
We’ve all been in that position where one paycheck simply cannot stretch to cover all of the bills! In fact, almost 80% of Americans claim they are living paycheck to paycheck.
Payday lenders are there to assist in this situation. Payday loans online generally give borrowers the amount of their next paycheck in advance. This is why they are often called “payday advance loans.”
Borrowers will have to pay this loan back when they receive their next paycheck (or source of income). Thus, payday loan repayment terms are generally 2-4 weeks long.
There are advantages to requesting a payday loan from a licensed lender. For one thing, it can be a lifesaver to have that cash on hand, especially if something unexpected has come up!
For another, payday loans no credit check often cater to individuals with poor or nonexistent credit. Many lenders won’t even do a “hard” credit check when looking at applications. Hard credit checks do impact credit scores.
The one thing to keep in mind is that payday loans typically come attached to relatively high-interest rates (APRs). In some cases, APRs can soar as high as 400%.
Payday lenders may also charge borrowers a range of fees for securing the loan.
How Do Payday Loans Affect Your Credit?
The big question is: do payday loans impact your credit score?
Yes and no! Here are our thoughts.
Requesting a Payday Loan
First, it’s important to note that any time you request a line of credit, this request appears on your credit file. This is the case even if your requests are rejected.
Most Americans are not aware of this. But remember: your credit file is basically a record of your entire borrowing history, so applications should logically appear there.
So, if you do turn to a licensed payday loan instant approval lender and ask for a payday loan, this request will show up on your credit record.
This isn’t necessarily a bad thing. However, payday lenders may run a “hard” credit check, which can impact your credit score. Hard checks can linger on your credit file for up to 2 years.
Plus, it may cost you a couple of credit points.
Don’t worry, though! Plenty of lenders don’t run a “hard” credit check. Many will simply run a “soft” credit check, which doesn’t show up on your credit report or affect your credit score.
Still, others don’t even bother inspecting credit, provided you supply an eligible bank account and meet other application terms.
If you have secured a payday loan, it doesn’t end there. How you manage this bad credit loan and its repayment can impact your credit.
Payday loans are highly short-term installment loans. This means that they will have rapid repayment terms. In some cases, this means simply paying the loan back by the date of your next paycheck (often two weeks).
In others, it could be sooner. You may, for example, have to pay lenders back in weekly installments. At worst, you may have to make payments twice a week until the loan is paid back in full.
In general, if you make your payments on time, you won’t be hurting your credit score. You may even be able to build credit by demonstrating you are a responsible borrower.
If you miss your payments, however, this can be devastating for your credit. Payday loans are considered high-risk loans, which is why they come attached to so much interest and fees.
If you default on a payday loan, you will essentially be displaying unreliability as a borrower. This can cost you valuable credit and prevent you from taking out other loans in the future.
Applying for More
You may be tempted to request more payday funds after you’ve paid one off. This is understandable, especially if you are in financial straits.
However, applying for several online loans in a short span of time can be a red flag to creditors. It can put you at risk for missing future payments. Plus, it can indicate that you are in a financial dilemma, which makes you even more of a high-risk borrower.
Lenders may not be able to approve you for additional funds if this is the case.
They may also take a look at your debt-to-income ratio. If this ratio shows high debt and slim income, you may not be approved for extra cash.
Do Payday Loans Help Your Credit?
We’ve discussed how payday loans may negatively impact your credit score. At the end of the day, can payday loans help your credit?
You can use payday loans to recover from bad credit and build new credit. However, there are caveats.
Use Payday Loans Sparingly
If possible, try not to request multiple payday loans online no credit check in a short time period. Doing so (as mentioned above) can be a red flag to creditors and lenders.
Use payday loans sparingly, and only after you have done your research well. If possible, seek out lenders who perform soft (not hard) credit checks when looking at applications. This will keep you from losing valuable credit points.
Also, prioritize lenders with generous repayment terms and transparent contracts. Make sure you can meet repayment terms before agreeing to a payday loan!
Don’t Miss Payments
Whatever you do, don’t miss those loan payments. Making on-time payments demonstrates that you are a responsible borrower.
This is vital for building credit or, at the very least, keeping your current score intact.
Consider Longer-Term Alternatives
To boost your odds of building credit, consider longer-term alternatives.
A personal loan, for example, can have lower interest rates and longer repayment terms. These can give you a chance to prove your ability to be a good borrower over an extended period of time.
You are eligible for personal loans even if you have bad or nonexistent credit.
Final Thoughts: Payday Loans and Credit
Do payday loans help your credit? They absolutely can, provided you use them responsibly.
We recommend doing your research well before requesting a payday loan, just as you should before getting a cash loan. Read our tips for getting a payday loan without paying too much money here!