Your credit rating is a numerical score given by a lender after they have looked at your application and checked your file with a Credit Reference Agency. Every lender has a different method of working out your credit score, so you don’t just have one number that represents your credit score. It differs from lender to lender. This is why with one lender you might come out as ‘fair’ whereas another will see you as ‘good’.
The effects of taking out a payday loan on your credit rating
Like any form of debt, payday loans do affect your credit rating. How much they affect your rating depends on your record of paying the loan off. Some lenders regard any credit you have had – and managed to pay back without a problem – as a plus. If you are seen to be a responsible borrower then your credit rating will go up. There are people from all walks of life who use payday loans; they are not just for people with continuing financial problems.
Different lenders have their own criteria for accepting or rejecting loans. Some lenders just look at a loan as a loan, whether it is a payday loan or a loan from another financial institution. Others may well be more circumspect about approving a loan to someone with payday loans on their record. That’s why you might get rejected by one company, whereas another company will accept your application.
How to reduce the effect of payday loans on your credit score
Pay your loan back on time
Like all debt, it looks a lot better on your credit rating if you show you can pay it back on time.
Don’t make multiple applications
Making multiple payday loan applications can look bad on your credit rating. Only apply when you intend to take out a loan. It may also be better to apply through a broker service, like Money Pod, as this will only count as one application.
Don’t regularly take out payday loans unnecessarily
While taking out one payday loan is not a killer blow to your credit score, repeatedly taking out payday loans may suggest you can’t manage your finances. This will not make you an attractive option to a lender.