We answer eight previously unanswered questions about payday loans and your credit score.
Payday loans aren’t necessarily the first loan of choice for many people. They’re often taken out due to necessity from bad credit history, a need for a quick financing solution or just because of the short terms and low amounts that are available.
There is some negative talk surrounding the short term lending landscape, and you may have questions as to what the impact on your credit score will be if you choose to take out such a loan. We’ll answer some of the most common questions asked about payday loans and credit scores, and help you understand this type of loan a bit better. Because while applying for a payday loan — or any other kind of credit — might be a quick solution, it can have long term effects that need to be considered.
So, do payday loans actually go on my credit file?
Yes. Your credit file is a detailed record of your credit history, and as such will include details of any payday loans you have applied for or taken out.
How do short term loans appear on my credit file?
Your credit file has three sections; consumer credit information, commercial credit information and public credit information. Any payday loans you apply for or take out will be listed in the consumer credit section. The following information will be visible:
- Credit enquiry.
Every time you make an application for a payday loan, or any other type of credit, the enquiry will be listed on your file
- Type of credit.
This will be listed as a personal loan on your credit report
- Account terms.
The opening date and closing date of the account will be listed
- Credit limit.
This is the amount of your payday loan
- Payment history.
The payment information for your loan will be shown, including whether you made your payments on time
- Defaults/overdue accounts.
If you miss a payment and your account goes into default, this will be listed on your credit file.
How can payday loans help my credit score?
Just like overdue credit account may hinder your credit score, payday loans may actually help your credit score. With the introduction of positive credit reporting on March 12th, 2014, more information is listed on your file about your borrowing history. This includes having more details about the type of credit account you opened, along with when the account was opened and closed and your payment history.
So how does this positive repayment history affect your credit file in regards to payday loans? For one, making your payday loan repayments on time can negate any adverse credit history on your file. Belinda Diprose, marketing manager at Equifax, says that an Equifax Score takes into account the information on a credit report at any one point in time but the weight placed on this information will differ.
"A payday loan would, for example, be given a different weighting than a mortgage. Making your repayments on time each month is one of the key ways consumers can help to keep their credit profile healthy" she said.
Another advantage of positive repayment history is that the credit limit of open credit accounts is displayed. So, if you currently have a payday loan you’re in the process of paying back, and a prospective lender looks at your file, they will be able to see that your loan is relatively small. Before, they would have just seen that you had made an application for a loan, but not known whether you’d opened it or how much credit you were afforded. Now, borrowers can have a clearer idea of your financial position.
Before, they would have just seen that you had made an application for a loan, but not known whether you’d opened it or how much credit you were afforded. Now, borrowers can have a clearer idea of your financial position.
Find a lender that doesn't check your credit file
How do payday loans negatively impact my credit score?
Your credit score is calculated by individual credit reporting agencies and the impact differs depending on what agency’s calculations you look at. Diprose says that the impact of information on someone’s credit report depends on several different factors.
"It is not only the type of lender but the type of credit account, the amount applied for, number and frequency of credit enquiries, as well as a range other factors. A payday loan would, for example, be given a different weighting than a bank mortgage and may contribute to a lower score" she said.
An ANZ spokesperson also spoke about the effect payday loans have on credit scores. "A history of payday borrowing doesn’t directly impact the amount a customer can borrow. However, it may impact the credit score of a customer which is then used in the assessment of loan applications."
With credit scores having a direct effect on a lender’s decision, the impact payday loans have on your score can’t be ignored. Although, keep in mind that your credit score is just one of the factors that influence a lender’s decision.
"We assess all loan applications against a set of criteria, including a customer’s ability to repay a loan and a review of their credit history/report," said the ANZ spokesperson. "We don’t specifically exclude someone because they may have had a pay day loan in the past."
However, there are ways to keep an eye on your credit file and monitor the impact different type of loans had on your credit score.
Diprose said: "When you receive your Equifax Score as part of an Equifax Your Credit and Identity package you are provided with the score "contributing factors" which are the items on your credit report that had either a good or not so good impact."
How do banks see borrowers who have previously taken out payday loans?
According to an ANZ spokesperson:"There is no direct impact on a customer’s ability to take out a loan, however, if the customer has a very active credit report from multiple credit checks undertaken by payday lenders, this may factor into our decision. Generally, credit scores can be negatively impacted by multiple enquiries from potential financiers. ANZ uses credit scores when assessing customer applications."
Similar sentiments were echoed by both NAB and Westpac. A spokesperson from NAB said, "NAB treats all potential and existing customers consistently and assesses their ability to access credit on a case-by-case basis regardless of whether they have taken out a "payday" loan or not."
Westpac also said that previous loans were taken into account, but that this was "not specific to payday lenders."
Will banks not approve me for credit if I’ve taken out a short term loan?
When you take out a certain type of loan, you want to be sure that it won’t affect your ability to borrow in the future. Lenders look at a wide range of factors to determine your suitability as a borrower, including your borrowing history, current open credit accounts, payment history, among other things.
As outlined above, payday loans appear on your credit file as personal loans and are usually for small amounts, so are not risky in this respect. However, as outlined by Diprose, the weight placed on a payday loan when it comes to "risk factors" for your credit score would be different to other types of loans.
What are some common mistakes to avoid when it comes to payday loans and your credit file?
Taking out a payday loan could be a quick decision you make to cover some emergency expenses, but don’t let the ease of the application process lead you to commit any of these common mistakes:
- Taking out too many loans. Once you have repaid a payday loan, you may be tempted to take out another one. But taking out several small amount loans may be a sign to future prospective lenders that you are not in a stable financial position. It doesn't matter if you are repaying the loans on time; the fact that you needed to take out so many loans to begin with may not be a good sign to lenders.
- Not making your repayments on time. As mentioned earlier, repayment history is now listed on your credit file. This makes it more important than ever to make your repayments on time. Any missed or late repayments will be listed on your file and will be able to be seen any lenders who look at your file for two years.
- Making several applications in a short space of time. As well as taking out too many loans, you should avoid making too many applications within a short time period if you aren’t approved for a payday loan. All applications show up on your credit file, and now account opening dates are visible, so lenders will be able to determine whether you were approved based on your applications and how many accounts were opened. Making several applications can indicate that your finances aren’t in good standing. If you were rejected it can give another lender a reason not to approve you also.
- Not checking your credit file. When making loan applications online it helps to stay on top of your credit file to watch for identity theft. It’s also important to check that the loan is being listed correctly, and also to see what your current situation looks like to lenders who do check your file.
Payday loans and bad credit: How does one affect the other?
Short term loans are one of the few financing solutions that can help those with bad credit, with some payday lenders not performing a credit check at all. In turn, failure to make repayments on a payday loan, or taking out too many, can have a negative effect on your credit rating, and can actually see more negative marks appear on your file.
So while having bad credit can put you in a position where you have few other alternatives but to opt for a payday loan when in need of credit, it can also see you put into more of a financial predicament and see your credit position turn sour if you fail to repay the loan. Although, as outlined in earlier, it can also help your credit score if you make your repayments on time and don’t take out too many consecutive payday loans.
Payday loans, just like any other type of credit, can have an impact on your credit score —but whether the impact will be positive or negative depends on you.
Warning about Borrowing
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
- For information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor
- Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan
- If you are on government benefits, ask if you can receive an advance from Centrelink: Phone: 13 17 94
The Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.