Do Payday Loans Affect Your Credit Score?
If you’ve been hit by an unexpected expense, a payday loan could act as a financial float to keep you above water between one payday and the next.
Before you decide whether to search for a payday loan, it’s important to understand how applying for and managing one could affect your credit score.
Please note that Little Loans is a credit broker, and none of the lenders on our panel offer payday loans. You could use Little Loans to search for a short-term loan with a range of repayment terms from 3 to 60 months, depending on the amount of money you apply to borrow.
What is a payday loan?
A payday loan is money you borrow from a lender, which you repay within a month. If your application is approved, the money will be sent to your bank account. Once you’ve received the money, you can use it to cover whatever it is you need it for.
Do payday loans ruin your credit score?
Whether a payday loan ‘ruins’ your credit score will depend on how your loan is managed, as well as how many direct lender applications you make while searching for the right loan for you.
How will a payday loan affect my credit score?
A payday loan, like any loan, will affect your credit score. Whether the impact of a payday loan on your credit score is positive or negative will depend on how your loan is managed.
- Searching for a payday loan
When you make a payday loan application with a direct lender, they will carry out a full credit check, known as a creditworthiness assessment. This will include a hard search or an Open Banking check. A hard search will stay on your credit file and be visible to other companies for up to 12 months.
If you apply for a payday loan with several different lenders, multiple hard searches could be carried out, and this could cause your credit score to decline. - Repaying your payday loan
Your loan repayments will influence your credit score.
Your repayment activity will be reported to the credit reference agencies (CRAs). Late or missed repayments could have a negative effect, while repaying your payday loan in full and on time could have a positive impact.
If you’re struggling with your finances and can’t repay a payday loan, you should contact your lender as soon as you can. There may be things they can do to help reduce some of the pressure you’re facing. We’ve included some resources that you might find helpful at the bottom of the page.
Can I get a payday loan for bad credit?
Having a bad credit history doesn’t mean that your payday loan application will be automatically turned down. However, it’s sensible to manage your expectations and understand that a history of bad credit could limit your borrowing options.
If you find a payday loan lender willing to consider applications from people with bad credit, please stop and consider how applying for a new form of credit could affect your current financial situation and credit score.
You should never apply for any loan unless you’re certain that you can afford to make your monthly repayments without leaving you unable to cover the cost of your essentials, such as housing, bills, and food.
Could a payday loan be good for my credit score?
As we discussed in the section above, if you repay your payday loan on time, your positive repayment activity could improve your credit score; however, you shouldn’t apply for a loan with the sole aim of improving your credit score. A loan is a serious financial commitment, and you shouldn’t make an application for a loan unless you need one and other options, such as borrowing money from a loved one, aren’t possible.
Do payday loans go on your credit file?
Yes, if you’re approved for a payday loan, your borrowing and repayment activity will be added to your credit file.
How long will a payday loan stay on my credit file?
A payday loan will stay on your credit file for up to 6 years.
How can I minimise the impact of a payday loan on my credit score?
There are things you could do to help protect your credit score when searching for and managing a payday loan.
- Consider using a credit broker
You could limit the number of direct lender applications you make by using a credit broker.
A credit broker can scan a large panel of direct lenders to help you search for a suitable loan using a soft credit check with no impact on your credit score.*
Little Loans is a credit broker, and while the 30+ lenders on our panel don’t offer payday loans, they do provide personal loans with a range of repayment terms. - Make your repayments on time
As discussed, your repayment activity will be reported to the CRAs and making your repayment(s) on time and in full could improve your credit score. - Look after all existing credit commitments
It’s important to keep on top of all your credit commitments. Managing your payday loan responsibly will not improve your credit score if your other credit commitments are not handled the same way. - Practise other credit-building techniques
Credit building is a journey, and the more credit-building techniques you use, the better your chances of working towards a healthier credit position. We’ll talk about other credit-building methods in the section below.
How to improve your credit score
- Register to vote at your current address. This makes it easier for potential lenders to verify your information and could boost your credit score in the process.
- Make sure all your bills and any other credit commitments are paid on time. It might help to set up a Direct Debit. This is where an authorised company, such as your energy supplier, automatically take money from your account when a payment is due.
- Be aware of your financial associations. When you’re financially associated with someone who has a bad credit score, your own score could suffer as a result. Sharing a financial product, such as a mortgage or a joint bank account, with someone will link you financially to them.
- If you have a credit card, avoid using it to withdraw money from a cash machine. This is called a cash advance and could signal poor money management, which in turn could harm your credit score.
Alternatives to payday loans that won’t affect your credit score
- Save up
Saving up the money you need will not be a possibility for every situation; for example, if you need to get the boiler replaced in the middle of winter. However, there may be circumstances in which saving up for a couple of months rather than applying for credit is realistic. Using your own money rather than taking out credit will save you on interest. - Borrow money from friends or family
If you borrow money from a loved one, you must both agree to a repayment schedule and ensure that you stick to it. Discuss whether you will need to pay any interest and when you’ll need to repay the money. You should think very carefully before borrowing money from someone you know; if you don’t keep to your side of the agreement, your relationship could be at risk.
Payday loan alternatives: search for a short-term loan
Little Loans could help you search for a short-term personal loan from £100 to £10,000 with a repayment term between 3 and 60 months, depending on how much you apply to borrow.
You can use Little Loans to search for a payday loan alternative if you:
- Are over the age of 18;
- Are a UK resident;
- Have a UK bank account and a valid debit card; and
- Have a regular source of income paid into your bank account.
Wondering whether you could get a short-term loan for bad credit? Little Loans works with several lenders who specialise in loans for people with bad credit, and they could be willing to consider your application.
Five reasons to choose Little Loans to help you search for a payday loan alternative
- We work with a panel of over 30 direct lenders, all of whom are authorised and regulated by the Financial Conduct Authority (FCA).
- From poor to excellent, all credit scores welcome to search for a short-term personal loan with Little Loans.
- Searching for a short-term loan with Little Loans will not affect your credit score in any way.*
- Some of the lenders on our panel could send your money on the same day your application is approved.**
- Our service is completely free to use.
Free financial advice in the UK
Any of the charities and organisations listed below can offer you free, confidential debt and money advice through a range of services, including live chat, WhatsApp and telephone.***
*A soft search will not harm your credit score. If you’re matched with a loan through a search with a credit broker and choose to make a full application with the lender, they will complete a creditworthiness assessment, which will include a hard search or an Open Banking check. A hard search will be visible on your credit file for up to 12 months, and multiple hard searches in a short period of time could damage your credit score.
**Payout timescales vary between lenders. The time it takes for the money to become available in your account will depend on your bank’s policies and procedures.
***Please refer to individual websites for contact opening hours and call charges.
Representative example: Amount of credit: £1000 for 12 months at £123.40 per month. Total amount repayable of £1,480.77 Interest: £480.77. Interest rate: 79.5% pa (fixed). 79.5% APR Representative. We’re a fully regulated and authorised credit broker and not a lender