credit-score

When you’re looking at ways to boost your credit score, you’ll find a lot of contradicting advice. For example, some experts claim taking out a payday loan can improve your credit rating. Others claim that payday loans can damage your credit rating.

So how do you know which ones to believe? Well, the truth is payday loans can have both a positive and a negative impact on your credit score. It depends upon how you use them.

How payday loans can help

Payday loans are one of the most popular forms of short term credit available. Providing you avoid the dark alleyways where lesser known ‘companies’ masquerade their loan sharking as a legitimate loan business that can be useful in an emergency. To avoid any mishaps borrow from one of the established lenders (we suggest Wonga, we forgive them for replacing their puppets with digital versions). You could have the money you need within an hour and you could be on the way to improving your score.

Wonga itself has advertised that its loans can help to improve your credit rating and it wasn’t lying. When used in the right way, a payday loan can improve your score and make it easier to get credit in the future. This is something that even top money expert ‘Martin Lewis’ has blogged about on his Money Saving Expert site.

The key to using these loans to improve your credit score is to pay them back early or on time. This shows you can borrow money and pay it back when you need to. Each time you pay the loan back, it will be marked on your credit report. However, this can also be a potential negative thing.

The risk of payday loans on your credit report

There are a couple of factors to keep in mind if you’re considering using a payday loan to improve your credit rating.

As The Guardian states, using payday loans can go against you in the future. This is because some mortgage lenders are now looking at payday loans as a negative aspect. Some are even turning down potential borrowers if they have used a payday loan. It’s worth noting that taking out a payday loan won’t automatically exclude you from getting a mortgage, it may just make it harder.

It’s also worth noting that one or two payday loans won’t make too much difference. It’s only if you’ve taken out several loans that it starts to become a concern. Applying for lots of payday loans will also damage your credit score.

Every time you apply for credit, it gets marked on your report. If you’ve taken out a lot of loans, creditors may look at that as you’re constantly in financial trouble. Therefore they will be less likely to offer you the credit you’re asking for.

So while one or two payday loans could help to improve your credit score, taking out too many will have the opposite effect.

You also need to ensure you make the repayments. If you miss a repayment on the loan, it will have a serious negative impact on your credit report.  Payday loans are considered cheaper than going into a bank overdraft. However, you do need to be careful when using them to boost your credit rating.