Can Payday Loans Help Your Credit Score?

Payday loans are generally not reported to the top three national credit reporting companies, so they are unlikely to affect your credit ratings. Just as applying for a payday loan won't automatically lower your credit score, paying it on time won't increase it either. Because payday loans and on-time payments are not reported to any of the three national credit bureaus: Equifax, Experian and TransUnion, these payday loans cannot help improve your score. Payday lenders don't typically perform credit checks on applicants, so requesting one won't appear as a harsh query on your credit report and they won't notify credit reporting agencies when you receive one.

Because these loans go unnoticed, they don't help or hinder your credit history if you pay them as agreed. A payday loan usually doesn't appear on the credit records of Trans Union, Experian, and Equifax, which are three major credit reporting agencies. However, special credit reporting agencies may collect your payday loan history. Lenders can keep this in mind when you apply for loans in the future.

If you don't pay a payday loan, your file may enter the collection process and a debt collector may report your debt to major national credit bureaus. This is really the only time when payday loans will affect your credit rating. Paying off a loan on time is a good way to build a positive credit history and improve your credit score. But those who use a payday loan shouldn't expect any good marks on their credit history if they pay on time.

However, they will report their loan to FactorTrust and Clarity, which are mainly used by payday lenders. In the past two years, 13 percent of millennials report applying for a small short-term loan, such as a payday loan, according to a survey of approximately 3,700 Americans conducted by CNBC Make It in conjunction with Morning Consult. Even if a person doesn't default on a payday loan, there are still plenty of reasons why payday loans aren't the best idea. It may surprise you, but people actually apply for a second payday loan (from a different company) to pay off their first payday loan.

And since there is no set definition of what constitutes a payday loan, your state may allow other types of short-term personal loans. The Federal Trade Commission recognizes that a personal loan can help cover expenses, but warns that they are mostly unsecured loans. The loan amount plus financial charges will be credited to the lender's bank account on the next payday. To try to mitigate that risk and ensure that they recover as much of their initial loan as possible, banks charge interest on the loans and lines of credit they provide.

Payday loans are fine, but since the interest rate they charge is quite high, those loans should be taken with that knowledge and repaid as quickly as possible. But while payday loans can provide much-needed emergency cash, there are dangers you should be aware of. Can Payday Loans Improve Your Credit Score? Yes, they absolutely can. But is a payday loan the best way to improve your credit score? Probably not.

We've covered it all so you can understand exactly how a payday loan can affect your credit rating. Each state's laws are different and, in fact, payday loans are illegal in several states, so there could also be help there.

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