How Can Payday Loans Impact Your Credit Score?
Payday loans provide a quick and easy solution to any financial emergency you’re faced with. Consequently, offering a short term answer to your current problems. However, despite sounding ideal and being handy, they can actually have many negative effects if used incorrectly, or for the wrong reasons. Therefore, it is important that you are borrowing safely in order to prevent spiralling into further financial problems. One of the most common aspects a payday loan can affect is your credit score. But, what actually is a credit score and how does a loan impact it?
Your Credit Score Explained
Your credit score is a numerical rating based upon your financial management that informs lenders of your creditworthiness. This way, they’re able to identify whether or not you are a risk to lend to. Your score is created using your previous financial history. This typically includes factors like your payment history, new and old credit, and amounts you have previously owed. After all the information is gathered, your result creates a three-digit number that is accessible online to lenders and yourself.
Why Do Payday Loans Impact Your Score?
Never mind which lender you decide to opt for throughout your payday loan process, your score will, unfortunately, be affected. This is because when applying for any kind of credit, lenders will conduct a hard credit check. This is to ensure their safety and your reliability. Your credit report will show the lender any factors they need to be aware of before lending to you. This way, the process will run smoothly in the favour of both parties.
Despite credit checks being essential, they actually have a negative effect on your credit score. According to FICO, a hard inquiry can deduct around 5 points, depending on your position. If your score is at the higher end of the scale, you may have fewer points removed. Whereas those with poorer results could have the full five deducted from their current number.
Along with this, when borrowing a payday loan you need to be able to ensure the instalments when repaying. This is because your score can also decrease if you miss or are late to any payments.
What To Do If You’re Struggling
If you’re struggling and your applications are not going as planned, the worst thing you can do is apply to more lenders. This is because every instance will be separately recorded, meaning more and more points will be removed from your score. Following this, having a low credit score will hold you back in many ways, not just in relation to payday or short term loans, but also in other aspects like mobile phone bills, car insurance policies, etc.
How Can I Prevent This?
The only way you can avoid hard credit checks is to avoid loans at all costs. But, this isn’t an option for everybody, especially those in emergencies. We understand that not everyone has access to savings or the ability to borrow from those around us. So, despite not being able to completely avoid impacting your credit score, there are still multiple ways you are able to prevent larger deductions from occurring.
Here at PM Loans, we are both a direct lender and a broker. Therefore, if we are unable to offer you the loan directly, a lender within our large panel will be able to. This way, you do not have to worry about multiple credit checks on your record as you’ll be approved automatically by one of the lenders.
This way, you’re not applying to multiple agencies separately, meaning you’re minimising the number of credit checks that occur, allowing your credit score to stay in its best position.
How Can I Improve My Score If Affected?
If you’ve already made the mistake of multiple applications or unnecessary decisions, you don’t have to worry. Thankfully, there are many ways to improve your credit score if negative changes are becoming clear. One of the most common ways you can make a difference is by controlling your payments.
As we mentioned above, payment history is one of the biggest factors that relates to your credit score. Therefore, ensuring you are repaying any debts or bills on time is essential to moving forward. Another factor that goes hand in hand with on-time repayments is guaranteeing your finances are repaid in their full amounts. Otherwise, you could lose even more points.
For other ideas on how to improve your credit score, click here.