How Does a Payday Loan Affect Your Credit?

Timely payment of a payday loan won't improve your credit score.
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Taking out a payday loan can provide quick relief in a financial emergency. These are short-term loans that can hold you over until you get your next paycheck. In some respects, it's like borrowing from family or a friend in a pinch -- there are usually no credit requirements and the loan won't have much effect, if any, on your credit report or score.

No Agency Reports

Credit reporting agencies keep tabs on your borrowing and repayment activity. The big three are Experian, Trans Union and Equifax. Virtually all reputable lenders use one or more of these agencies, but payday lenders typically don't report to them, according to the Consumer Financial Protection Bureau. If you take out a payday loan, it's unlikely that anyone other than the lender will know unless you tell them. If you pay the loan back promptly, the activity won't raise your credit score. Conversely, if you default, this event won't show up on your credit report either provided the lender doesn't turn you over to a collection agency or sue you.

Debt Collectors

Payday lenders often sell or assign their bad debts to debt collectors. If you default and your payday lender turns the debt over to a collection agency, the agency is probably going to pursue you wholeheartedly for the money. It doesn't get paid unless and until you make good on the debt. The federal Fair Debt Collection Practices Act controls what debt collectors can and can't do to try to get you to pay, and they can report your account to one or all of the credit reporting agencies. Your payday loan would then appear on your credit reports and affect your score.

Lawsuits and Judgments

Even if the lender doesn't turn your loan over to collections, a defaulted payday loan can show up on your credit report if the lender sues you for the unpaid balance. Lawsuits and judgments issued against you are matters of public record. The credit reporting agencies regularly review public records to gather this type of information, then they report it and use it when calculating credit scores. Judgments and lawsuits can stay on your credit report for seven years, even if you pay off the underlying debt.

Special Credit Tracking

The Consumer Financial Protection Bureau warns that some payday lenders report to specialty credit reporting agencies. These companies gather information on loans of this nature. Payday lenders might also request a report from such an agency when deciding whether to approve someone for a loan. Even if information about your payday loan doesn't reach the three major credit reporting agencies, it's possible other payday lenders know about it through this source. This might help or hinder your ability to get other payday loans in the future.