A Payday Loan Can Affect Your Credit Score

Written By Devi Kristanti on Sunday, June 22, 2014 | 2:52 AM

How can a payday loan affect your credit if no credit check is required to obtain one? This question might be on the minds of many dismayed borrowers who have experienced a credit ding after taking out a payday advance.

While many may desire to maintain good credit for social reasons, or simply to avoid the hounding phone calls of collectors, most people care about their FICO scores because they recognize the benefits that come from good credit: low interest rates, higher credit limits, and multiple loan options top the list. These same individuals might seek out a paycheck advance rather than a cash advance or other type of loan because they think the loan advance is friendlier to their credit scores. It is true that unlike credit cards and long-term loans, payday loans do not require a credit check to secure quick funds and thus do not cause a credit inquiry which can lower your score; however, the way borrowers treats the repayment of said loan can affect their credit score and, if mistreated, lead to more financial issues down the road.

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Before taking out a loan, consider the following information about how these advances can affect your credit and what options are available to borrowers to protect their score.

*As with any money-loaning business, these loan providers can, and will, report delinquent and/or neglected payments to the three major credit bureaus: TransUnion, Experian, and Equifax. For this reason, it is imperative that borrowers are certain that they can repay a loan in full, and on time, to avoid serious credit issues. Similarly, writing a bad check can likewise affect a borrower's credit score, so borrowers are wise to make sure that funds are available in their bank accounts prior to attempting a payment. If a borrower is uncertain whether or not a payment can be made in full, he/she should avoid taking out a payday advance.

*Payday loan lenders provide options for people that cannot pay back their loan immediately. For an additional fee, the repayment of a payday advance can be rolled over to the borrower's next pay period. However, this requires the borrower to communicate with the loan provider to ensure that one's credit will not be damaged. Additionally, the habitual rolling over of loans can snowball into a cycle of borrowing that is incredibly expensive. On the inverse, even though this option may not be the most cost efficient, it may help borrowers protect their credit scores. Therefore, borrowers should consider both their finances and their credit before rolling over loan payments.

Although tough financial times might lead one to make rash decisions, carefully considering the pros and cons of a payday advance, and one's ability to pay it back, is essential to protect one's credit. It is foolish to ignore the consequences of late or non-payment of loan advances. If one was to neglect paying their credit card, the credit card company would report the infraction and stop giving credit to said individual; the same goes for payday loan providers. Not only will a borrower damage his/her credit by disregarding his/her payment responsibilities, but said individual may be illegible to receive such advances in until the loan is paid in full. Don't be left questioning! You can avoid these consequences by abiding by the loan agreement, thereby securing your credit health.

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