Understanding Payday Loans And Your Credit Score

Posted on: 4 March 2015

Anytime you think about using a form of credit, from mortgaging your home to taking a payday loan for groceries, you should be concerned about how the decision will affect your overall credit score. This is true whether you are just starting to build your credit, have a history of bad credit or a bankruptcy, or have a decent credit portfolio built. Although you may understand how traditional loans and credit cards affect your credit rating, it can sometimes be unclear what affect payday loans will have. Here are the main things you need to consider before taking a payday loan. 

Will Your Lender Reports Your Loan A Major National Credit Agency?

According to the Consumer Finance Protection Bureau, most payday lenders do not report their loans to the national credit agencies. However, payday lenders may report your loan to a minor credit agency and a select few lenders report to major agencies. If a payday loan is not reported to one of the major credit agencies, paying it on time will not help you build credit if you are young or rebuild credit if you are recovering from a bankruptcy. However, it will also not reflect negatively on your credit score if you have several payday loans that you repay on time.

If you are looking to improve your credit, you will want to take the time to find a lender that does report to a major credit agency. However, you should keep in mind that payday loans tend to be an expensive way to rebuild your credit. If you currently have strong credit, you should not be worried about a payday loan looking bad on your credit report. 

Can A Loan Save You From Damaging Your Credit?

Missed payments on credit cars, car loans, or mortgages all reflect poorly on your credit. Your best option is to talk to your primary lender and ask for your due date to be extended to a later date when you are able to make the payment. However, if you are not granted an extension, a payday loan can help you make your payment on time.

Additionally, the fees associated with payday loans are sometimes lower than late-payment fees for credit cards. If you might miss a payment on your credit card, a payday loan can potentially save you money and prevent you from damaging your credit, which can be important if you plan to make a large purchase in the near future. 

Will Missing Payments On Payday Loans Damage Your Credit?

While most payday lenders do not report your loan to the major credit agencies, if you have a payday loan that goes into collection, your default will most likely be reported to one of these agencies. This is because the collection agencies that purchase debt from payday lenders regularly report to the three major credit agencies. For this reason, it is very important that you repay your payday loans on time.

If you are unable to make a payment, you should notify your lender as soon as possible and discuss options for extending your payment plan or rolling over your loan. However, you should be aware that these options can be as expensive as the original loan. 

The majority of the time, if you borrow responsibly, payday loans will not have a positive or negative effect on your credit rating. However, there are ways that you can use these emergency loans to protect your credit and failing to repay your loans on time can harm your credit. It is important that you consider the potential long term effects of all of your credit choices. For more information, visit a website like http://www.1stchoicemoney.com.