Can Paying Off a Payday Loan Help My Credit Score?

Yes, in theory paying off a payday loan on time can help and improve your credit score, but only by a small margin and taking out multiple payday loans is not a sensible option to build up your credit rating.

Any loans that are repaid on time are reported back to credit reference agencies such as Equifax and Experian. By repaying on time, this effectively increases your credit score or maintains it at a stable level – and this is also the case for credit cards, personal loans and mortgages.

However, payday loans online are designed to be used for emergency purposes and not as something that you should take out regularly. In fact, some mortgage lenders do not lend to customers with recent payday loan history. 

Therefore, whilst repaying a payday loan on time can in theory help boost your credit score, you should use this as a quick method to enhance your credit.

Should I Take Out Payday Loans To Boost My Credit Score?

No, you should not take out payday loans for the sole purpose of boosting your credit. There certainly are individuals who take out multiple loans with a view to pay them back on time and improve their credit score.

However, it is not sensible to take on more debt that you actually need and this could be flagged by future creditors and actually harm your chances of being approved for a product that you really do not need, like a mortgage. 

Payday loans are versions of same day loans that should be used for emergency purposes such as paying for car repairs, funeral expenses or household repairs – and not used for building credit.

Why Are Payday Loans Not Good For Building Credit?

Payday loans carry higher interest rates than typical financial products such as credit unions, personal loans or credit cards.

The interest rates that they carry are capped at 0.8% per day and this is higher than average – and if you struggle to repay them on time, you can incur late fees and penalties.

Whilst payday loans carry much higher APRs, sometimes as much as 400%, this is based on a product which is used for just a few weeks, and not an entire 12 months.

Not only are payday loans a more expensive and riskier product to take on, there is a general stigma about the product in British society. Lenders offering mortgages and personal loans may be more cautious lending to people who have had a recent payday loan (which they can see when they run a credit check). Some go as far as to say that they will not lend to payday loan customers at all. 

What Are Better Ways To Build Your Credit Score?

Use credit cards and builder cards – Simply having credit cards and paying these off on time is a good way to build up credit. In fact, there are specific credit cards for credit building which offer small amounts and help you improve your credit score. In terms of cost, you can often enjoy introductory periods at 0% for up to 24 months and keep trying new cards to enjoy this offer. 

Do not take out too many credit cards, because this can make you look risky to potential lenders because it looks like you have access to too much credit.

Pay off all debts on time – To get a good credit score or maintain a good score, you just have to get used to paying off all debts on time. This includes everything from loans, credit, bills, mobile phones, car payments and more.

Don’t use one loan to pay off another – Whilst paying off all loans on time is helpful, you should not use one loan to pay off another, since this can create a dangerous spiral of debt.

Close cards you don’t use – You should close down any credit cards or store cards that you do not use. Some will be incurring fees and the availability to a lot of credit is not looked at positively by a lot of lenders.

Join the electoral register – It is free to join the electoral register for voting in the UK and having your personal name and address linked to the government is shared with credit reference agencies and immediately improves your credit score.

Disassociate from people with bad credit – Your credit score can be damaged by having joint accounts or sharing financial products with spouses, parents or siblings with bad credit. The vendor takes a view that if you are sharing finances that you might be assisting them financially and be responsible for bailing them out. Or equally, they might think that this individual is applying on your behalf – so trying to separate yourself from these accounts is recommended.