Payday loans are infamous for being “quick fixes” for people who need fast, small, and convenient personal loans that banks and other financial institutions can’t provide. A payday loan can be up to $2,000 and has a maximum repayment period of 12 months.
Payday lenders are notorious for accepting applications from customers with bad credit histories or low credit scores, making these loans readily available to the majority of Australians.
But payday loans have major drawbacks. Due to the high interest rates and high fees on these short-term loans, the costs of this type of loan can spiral out of control and even cause borrowers to become more indebted.
Like most forms of credit, applying for a payday loan can affect your credit score. Payday loans aren’t entirely bad news for your credit history. However, these short term cash loans can also prevent you from having a clear score.
Here are the ways a payday loan can affect your credit rating.
There are many ways a payday loan can negatively affect your credit score.
A payday loan can negatively affect your credit score if you fall behind on your repayments or fail to repay the loan. Although most short-term loans don’t show up directly on your credit report, failure to repay the loan in full and on time can result in default.
A default is listed on your credit history if you have not made three consecutive payments on time and the terms have not been negotiated with the payday lender. If you have defaulted on your loan, this will result in a black mark on your registration record. A black mark will lower your credit score. It can also hurt your chances of getting approved for future loans, as it shows lenders that you are not responsible for servicing the loans.
Since payday loans aren’t required to do a credit check when processed, the majority of payday lenders don’t require a “serious inquiry” into your credit report, which can lower your score for a while. a short period.
However, any loan application (whether approved or rejected) is included in your credit file. So, if you apply for too many payday loans in a short time, or if you apply for a loan and it’s declined, it can lower your score.
If you currently have several other active credit accounts open and are requesting a large amount of credit, this could also hurt your credit score.
To avoid these negative effects, be sure to keep track of the requests you complete. You should also be alert to changes in your credit report. Consider other alternatives to a payday loan, such as applying for a personal cash loan or asking loved ones for help. If you want to know how to avoid going bankrupt before your paycheck arrives (which may tempt you to take out a payday loan), read here.
Payday loans don’t always affect your credit score negatively. If handled well, a payday loan can actually boost your credit score. To do this, make your payments on time and make sure to repay it within the stipulated time. This will be recorded as a good credit history, which will give a good image of you to lenders, as it shows that you have been able to manage credit well.
If you’re worried that a payday loan will lower your credit score, the best bet may be to avoid these fast loans. But if you must, be sure to evaluate a payday loan before applying. You can also use a loan calculator to make sure you are eligible for a payday loan.
Like all types of credit, it’s important to make your payments on time and to avoid asking for too much product in a short time. In doing so, a payday loan can even help boost your credit score by filling your credit report with positive information about your borrowing habits.
Explore nestegg for more tips on keeping your credit score healthy.