One of the major selling points of payday loans is that they do not conduct credit checks and even if they do they score credit ratings very leniently. This means that they often attract people or businesses that have a poor history with debt and may have missed payments, incurred CCJs or even bankruptcies on their credit history. However some clued up payday loan consumers are using payday loans to boost their credit ratings. This scenario comes with advantages and disadvantages therefore let’s look at these in more detail.
Payday loans can indeed be used to improve credit ratings. This is because once a consumer has applied for a payday loan, this transaction, like all financial transactions, is recorded by the credit agencies. Therefore providing you follow the terms and conditions set out by the lender and you repay the loan within 14 to 31 days including the additional interest, you will be scored favourably by the agencies. This is because they have concrete evidence that you are able to manage your loans sensibly and are therefore not a risky borrower. It is very important to be mindful that this sort of transaction does cost money i.e. the interest rate paid for the month on the amount that you borrowed. Therefore it is imperative to calculate if you can afford the transaction before signing up to it.
This leads onto the negatives of using payday loans to boost your credit rating. Firstly, some credit agencies may only record your payday loan transaction if you miss a payment and not if you adhere to it. Therefore they only report on the negatives and not the positives which means that obtaining the payday loan in the first instance is a waste of time.
Secondly, some agencies may have a negative perception of payday loans therefore view people who apply for these types of loans as desperate for money and looking for a last resort. This is very unfair but unfortunately it can be the case that this process actually harms your credit report rather than improving it.
As with any decision, there are positive and negative implications and this is indeed the case when looking at how payday loans affect your credit rating. If you are looking to improve your credit score by using a payday loan, especially if you already have a poor credit history and cannot find anyone else to lend you the money, then proceed with caution by familiarising yourself with both the advantages and disadvantages.