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Let’s dispel a myth right now – payday loans don’t hurt your credit score. In fact, they can actually help you build credit. Read more about it here.

As one of the most controversial financial products available, a lot of questions swirl around the idea of payday loans.

While payday loans can be incredibly helpful for those in a financial bind, the thought of these kinds of loans can be intimidating for some if you don’t know all the facts.

Let’s start by getting one thing straight—requesting a payday loan does not hurt your credit score.

What is a Payday Loan?

Also called a payday advance, salary loan, payroll loan, small dollar loan, or cash advance loan, a payday loan is a small, short-term unsecured loan regardless of whether repayment of loans is linked to a borrower’s payday or not.

This type of loan relies on the consumer having previous payroll and employment records.

Payday loans are often used by people who are in a bind with their finances and looking for some assistance in making it until their next paycheck.

In the majority of cases, this option is exercised if no other immediate resources are available, such as credit cards or savings account funds.

How do Payday Loans Affect My Credit Score?

Put simply, because lenders do not typically run a credit check during the application process. That’s why requesting a payday loan does not impact on your credit score.

In place of running a credit check, lenders inquire about your current employment status and source of income.

They can also mandate that you submit a post-dated check to cover the amount of the loan. This happens once funds from your employer are transferred to your account on payday.

However, there is an instance where your credit score could take a hit.

This would occur in the event that a post-dated check you sent to the payday lender does not clear the bank and you default on the loan. In this case, your credit score could be affected (unless you have another source of funds available to cover the due balance).

How will Payday Loans Appear on My Credit File?

There’s no question that payday loans will appear on your credit file, just as any other type of borrowing would.

These kinds of loans are found under the consumer credit section; so even if a payday loan didn’t affect your credit rating, lenders will still be able to see that you have had a payday loan(s).

It’s important to be aware that there are some lenders that will not lend to you if you have any active payday loan accounts.

In some instances, a lender may even have a policy not to lend to you if you have had any payday loan(s) recently.

Payday Loan Positives—How Payday Loans Can be Beneficial

If you meet your repayment obligations to the lender for your payday loan, you will have a clean repayment history. This can be beneficial for your credit file in the way that it shows you to be a reliable borrower, at least for this kind of financial product.

So, just as overdue credit may be negative for your credit score, a payday loan may actually help your credit score.

Since credit reporting in Australia got a makeover a couple years back, credit providers now get a more comprehensive idea of a person’s credit history.

With the introduction of credit reforms that came into effect in March 2014, more information is listet on your file about your borrowing history.

Since this includes having more details about the type of credit account you opened, when the account was opened and closed, and your payment history, your payday loans repayments can prove to be a positive thing.

If you have some adverse credit history documented, this is great news for you! Making your payday loan repayments on time can actually negate any unfavorable credit history on your file.

However, while some lenders take the information on a credit report at any one point in time into account, the weight placed on the info will differ.

Need even more reason to believe in the positivity of payday loans? Another advantage of positive repayment history for payday loans is that the credit limit of open credit accounts is displayed.

This means if you have one of these loans that you’re currently in the process of paying back and a possible lender takes a look at your file, they’ll be able to see that your loan isn’t hefty.

(In the past, prospective lenders would have only seen that you made an application for a loan, but not be aware of whether you opened it or how much credit you were afforded. Now you’re in luck, as borrowers can have a clearer image of your financial position.)

So We’ve Heard the Good News, but Can Payday Loans Negatively Impact My Credit Score?

Unfortunately, depending on the payday loan, it can hinder your credit score as well. However, since your credit score is calculated individually by each credit reporting agency, the impact differs depending on what agency’s calculations you look at.

Credit scores do have a direct effect on a prospective lender’s decision. Therefore, the impact payday loans have on your score can’t be ignored.

The good news is, your credit score is just one of the factors that influence a lender’s decision.

“It is not only the type of lender but the type of credit account, the amount applied for, number and frequency of credit enquiries, as well as a range other factors. A payday loan would, for example, be given a different weighting than a bank mortgage and may contribute to a lower score” said Marketing Manager, Belinda Diprose.

Fortunately, there are ways to keep an eye on your credit file and monitor the impact different kinds of loans have had on your credit score.

So You You’ve Decided to Take Out a Payday Loan, What Now?

While payday loans can be extremely helpful in sticky situations, don’t let the ease of the application process for the loan lead you to make mistakes.

Make sure to be careful with your loans and avoid the following common payday loan mistakes:

  • Taking out too many loans.
  • Not making your repayments on time.
  • Making several applications in a short amount of time.
  • Not checking your credit file.

Have you ever taken out a payday loan? Tell us what the process was like for you in the comments!

Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.