Will Taking Out a Payday Loan Harm My Credit Score?

No, taking out a payday loan will not harm your credit score. Assuming that you repay your loan on time, it will have zero impact on your credit score and it could very marginally improve your credit score as it looks like you are able to repay credit and your debts on time.

However, it is important to understand the implications of taking out a payday loan or same day loan which are typically assigned for emergencies and there is a stigma in the industry that payday loans are for people that are financially stretched.

Your credit score will be harmed if:

• You fail to repay your payday loan on time
• You apply for too many payday loans
• You take out multiple payday loans at once

Maintaining and building a good score is key, because it is one of the main things that lenders for all types of loans consider when assessing your eligibility for a loan. 

Your credit score information is held by one of the three main credit reference agencies in the UK: Experian, Call Credit and Equifax. Every time you make or miss a repayment for a credit card, phone bill or loan, your credit score goes up or down and keeping your score as high as possible is recommended to be able to access the most financial products and at the best prices.

Do Other Lenders Judge You If You Have Taken Out a Payday Loan?

There are some mortgage lenders and secured lenders who are more cautious with people that have taken out or have any existing payday loans open. This is because payday loans are usually for financial shortfalls or have a reputation for being for people that live pay cheque to pay cheque.

If you are applying for a mortgage, the broker or lender you apply with might ask if you have taken out any recent payday loans and if you have, there are some lenders that are very cautious and will not lend to you and some lenders that will be happy to take a view.

Of course, it depends how many payday loans you have open, how recently they were open, how often you take them out and whether you repaid them on time or not. 

If you have only taken out one payday loan recently and paid it on time, this is unlikely to be a cause for concern.

Will Applying for a Payday Loan Harm My Credit Score?

No, the simple act of applying for a payday loan online or in-store will not damage your credit score. 

The lender will likely carry out a soft search or hard credit search, but this does not impact your credit score and disappears from your credit report shortly after.

In this respect, applying for a payday loan will be like enquiring about any financial product, whether it is a credit card or personal loan.

Avoid Applying For Too Many Payday Loans

Whilst applying for a payday loan does not impact your credit score, it is not recommended to apply for too many loans in a short space of time – or repeatedly apply with the same lender until you are approved.

Every time you apply for a payday loan, or any type of loan, a credit footprint is placed on your credit report which shows other lenders how many recent enquiries you have made.

If a new lender sees dozens of credit searches within a short timeframe, such as a day, it could make the individual look desperate for funds or even a victim of fraud. In this case, the lender might be a lot more cautious and possibly decline the application.

Up to 12 credit searches looks quite normal, but any more than this could be considered risky. 

Missing a Payday Loan Repayment Will Affect Your Credit Score

If you miss a payday loan repayment on the scheduled date, this information will be sent from the lender to one of the credit reference agencies and your credit score will fall and it will show on your report that you are in arrears. The longer that the payment is in arrears, the more your score might fall. This information is key for future lenders to be able to see your financial status and to be cautious when lending to you or not.

By missing a payment, your score will not automatically fall overnight. You will typically be given around 24-48 hours by the lender to make the repayment before the information is fed back to credit reference agencies.

Avoid Taking Out Too Many Payday Loans At Once

There is no limit in the number of payday loans that you can take out, although a lender will review your credit report during the decision stage and will be unlikely to offer you a loan if you already have 2 or 3 payday loans open or outstanding.

If you have too many loans open, this does not make you look attractive to future lenders. This assumes that you are taking on a lot of debt and therefore they become less of a priority when it comes to repayment and therefore poses more risk to collect their funds.