Let’s dispel a myth right now – payday loans don’t hurt your credit score. In fact, they can actually help you build credit. As one of the most controversial financial products available, a lot of questions swirl around the idea of payday loans and credit ratings.

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 and weed out the facts from the fiction to bust these credit score myths

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.

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. This loan relies on the consumer having previous payroll and employment records. In most 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, 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.

However, there is an instance where your credit score could take a hit. This would occur if a repayment 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).

Myth #1: If I’m Not Getting a Loan, I Don’t Need to Check My Credit Score

FALSE. Other than lenders, your utility companies, potential employers, and landlords can also ask to check your credit score. It’s better to know your credit score for contingency in case you need to get a loan and checking your credit file regularly allows you to fix any discrepancies at once.

Note: Checking your own credit report, known as a soft enquiry (informal), doesn’t go on your record and doesn’t affect your score.

Myth #2: Good Income Equates to A Good Credit Score

FALSE. You have as good a chance at having a good credit score as anybody, whether you have a high salary or otherwise. Same as if you’re on a higher income and still not able to do repayments on time — which very much affects your score.

Myth #3: Once You Have a Good Credit Score It Stays Good

FALSE. Not paying your bills on time and not having credit at all can upset your good credit score. Having a no credit report doesn’t always work for your loan application advantage. After 5 years, in case of a clear out, transactions vanish from your credit file. Bad and (even) good behaviour can disappear from your credit history, so you still have to be careful of getting bad credit.

Myth #4: You Can’t Get a Loan If You Have Bad Credit

FALSE. With bad credit loans, the lender will assess your income and expenses to decide how much you can borrow — without a credit check.

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.

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 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 listed 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.

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 looks at your file, they’ll be able to see that your loan isn’t hefty.

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 and 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.

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.

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.