Do Payday Loans Affect Your Credit Score
Published by A1 Payday Loans on January 1, 2025
Payday loans often come with a short repayment period but what about the impact on your credit score? While you might think every type of loan impacts your credit, payday loans occupy an area that “credit” is usually not a factor. Let’s break down how payday loans in Ridgeland MS work in relation to credit reporting, when they might (or might not) impact your score, and steps to protect yourself financially.
How Do Payday Loans Work?
A payday loan is typically a small-dollar, short-term loan that you repay on your next payday (or within a few weeks). Requirements for qualifying are often minimal—usually, you just need proof of steady income, a valid ID, and an active bank checking account. Because the approval process happens quickly and lenders often don’t check your credit history in depth or at all, it’s common for borrowers with lower or no credit scores to turn to payday loans as a quick solution when needing an emergency loan.
How Lenders Report (Or Don’t Report) to Credit Bureaus
Upfront Credit Checks
Unlike traditional loans or credit cards, most payday lenders don’t perform a soft or hard credit check through the major credit bureaus (Experian, Equifax, and TransUnion). That means taking out a payday loan most often will not result in a “hard inquiry,” or any inquiry at all, which could lower your credit score by a few points.
On-Time Repayment
In many cases, payday lenders also don’t report positive on-time payments to the major credit bureaus. This is a key difference from other forms of borrowing, such as personal loans or credit cards. If a lender doesn’t report your repayment activity, paying the loan back on time won’t help your credit score and paying it back late, will also not hurt your credit score. Many customers prefer payday loans, for quick small amount loans, because there is often no risk of a payday loan negatively effecting your credit.
Late or Defaulted Payments
If you miss your repayment date or default on the loan, some payday lenders might sell your debt to a collection agency. At that point, the collection agency can report the delinquency to the credit bureaus, which can lead to a negative mark on your credit report and significantly lower your score. Most often the payday lender will work to resolve the debt with a payment plan, and if that fails, they may secure a legal judgement that allows your paycheck to be garnished to pay back the debt.
When Payday Loans Can Hurt Your Credit
Overdrafts and Bank Account Issues
Payday loans often require direct access to your bank account for repayment. If your account balance is too low on your due date, you might face overdraft fees if the payment has been ACH’ed from your account. Persistent overdrafts or negative balances won’t directly hurt your credit score, but they can lead to an account closure, which might complicate future credit applications. Keep in mind that often the bank overdraft fees are greater than the payday loan fees, so it is in your best interest to pay back the payday lender on time to prevent these bank fees.
Collections and Legal Action
If you default, some payday lenders will send your account to collections. Once a collection agency is involved, they can report that activity to the credit bureaus. A collection account on your credit report will likely lower your score and stay there for up to seven years unless you negotiate a pay-for-delete option or find another resolution. Most often, payday lenders work to collect the debit in house and will offer payment plans that all parties agree are favorable.
When Payday Loans Might Not Impact Your Credit
As long as you repay a payday loan in full and on time, most payday lenders won’t report anything to the major credit bureaus. While it won’t boost your credit score, it also won’t drag it down. Most payday lenders operate outside traditional credit reporting systems, which is why they don’t report activity—positive or negative. The only time they may do this is if the loan goes into default and gets sent to collections. If you’re specifically trying to build credit, there are other loans and financial products designed to report positive payment behavior to the credit bureaus, such as secured credit cards and credit-builder loans. It is important to ask your payday lender if they check or report to credit bureaus, and what is the protocol if you are unwilling or unable to pay back the money your borrowed.
Final Thoughts
Payday loans can be a quick solution for emergency cash flow problems. It’s best to use these loans to cover unexpected expenses that can’t wait until payday. To learn more about payday loans in Ridgeland MS, contact A-1 Payday Loans today. We have 20+ years in the industry and have built a reputation for providing exceptional service. You are eligible for these loans even if you have bad or no credit!