Payday loans are small unsecured loans with relatively short repayment periods. You can get one from either online or storefront lenders. These loans typically come with quick funding times — often the same day you apply — and can be used for things like utility bills, groceries, car repairs, or minor financial emergencies.
Unlike most loans, payday lenders rarely check your credit report when you apply. Because of this, there’s some confusion about how payday loans affect your credit score — or if they do at all.
Before you take out a payday loan, here’s what you need to know about their impact on your credit score.
Do Payday Loans Affect Your Credit?
In most cases, taking out a payday loan will not affect your credit score. This is because payday lenders typically skip the credit check when deciding whether to lend you money. Instead, they primarily make their lending decision based on your income and ability to pay back the loan.
Once you do take out a loan, very few payday lenders will report it to the three major credit bureaus — that is, TransUnion, Equifax, and Experian. As a result, there’s a very low likelihood that the payday loan will affect your credit score.
However, taking out a payday loan could impact your score in the following situations:
- The payday lender reports to the credit bureaus. The loan will then show up on your credit reports where it will count toward your total credit utilization (or amount owed). This accounts for 30% of your credit score. The loan may also affect your total credit mix, which makes up 10% of your credit score.
- You fail to repay the loan. Payday lenders will typically report missed payments to the credit reporting agencies. Late or missed payments will negatively impact your payment history and potentially bring down your credit score.
- The debt ends up in collections. If you don’t pay back what you owe, some payday lenders will eventually sell the debt to a collection agency. When this happens, the collection agency may report the loan to the credit bureaus. This can also hurt your credit score.
- A judgment has been filed against you. In rare cases, a lender will file a lawsuit against you for not paying back what you owe. If the lender wins the lawsuit, the court will file a judgment. Some credit reporting agencies do not list judgments, while others do. A judgment can remain on your credit report and potentially affect your score for up to 7 years.
Can You Remove Payday Loans From Your Credit Report?
Generally speaking, you cannot remove a payday loan from your credit report once it’s there. If you want to remove it, you’ll typically need to wait for it to fall off naturally, a process which can take up to 7 years.
There is an exception to this, however. If the payday loan was falsely reported, or if the lender did something illegal, you can file a dispute with the reporting agency. If you succeed, the reporting agency will remove the loan from your report.