We hear many things about payday loans these days and one of these is that they can be bad for our credit record. It is worth understanding a bit more about the loans and credit records before you worry about this.
A credit record is a record of all of the credit that you have. This might make you feel that it is just a record of your borrowing, but it is a bit more than that. It also has information about utility bill payments, rental agreements, mobile phone contracts and anything else where we are expected to make regular payments. It is something which is used by a selection of people to judge you before allowing you to sign up to them. This most likely to be lenders, but actually is also done by potential landlords and others who you enter into a long-term contract with.
One of the most frustrating things about credit records is that there is no standard score which will allow people to see whether they should trust you or not. It is not calculated in this way. It is merely a list of information about you which can be observed and used to judge you. Different people will have different ways of judging you. For example, if you have never borrowed money then they will have no way to know whether you are likely to make the repayments. It could therefore be tempting to think that borrowing could improve your credit score. Some lenders do not like to see you having borrowed money as it could show that you are more of a risk. Others like to see you behind in repayments as it means they could potentially make more money from you as you may miss repayments with them so they will be able to charge you more money as a result. Therefore whether taking any loan or a specific type of loan out will have an effect on your credit record is hard to say. However, having lots of outstanding debt or leaving too many things unpaid will not be attractive to anyone.
A payday loan is not really any different from other types of loan with regards to credit score apart from one thing. A payday loan is given to anyone, whether or not they have a poor credit score. They do not carry out a credit check and therefore do not reject people based on their credit record This means that many people will take out a payday loan because they cannot get a loan elsewhere.
If we take out any loan and have trouble repaying it, this will show up on our credit record. This might be something some lenders like as they may feel they can profit more from you if you are late repaying, however it will increase their risk. Some may just not be interested at all and others may lend to you but at a higher than advertised rate. If you have a loan outstanding for a very long time then this is unlikely to be appealing to anyone. Although in the short term, a lender can profit form you not making repayments in time, they do not want to risk you never being able to repay and so may be much more likely to avoid you if you have outstanding debt for a long period.
So if you do take out a payday loan it could send out the message that you have not been able to get credit elsewhere or that you do not want a lender looking at your credit record and so could reflect badly on you. However, as we have no idea what people checking a credit record are looking for it could be the opposite. They may see that you have a payday loan and as longa s it has been paid back in full on time they could see that as positive thing showing that you can be trusted to make your repayments. If you do not repay on time some could see this as an opportunity to lend to someone that they could make money off. However, this will depend on the purpose someone is checking your credit record.
So in conclusion, it is very hard to know exactly what impact having a payday loan might make on your credit record This is because we are never sure what anyone is looking for when they are checking your credit record. It is best to therefore not worry too much about that but think about why you are taking out the loan, whether it is the best option for you, whether you can pay it back and whether it is the cheapest option, rather than getting concerned with your credit score and the impact that might have.