How do payday loans affect your credit report?

What is a credit report?

Your credit report – sometimes referred to as your credit file – details your financial history. You are entitled to request a copy of your statutory credit report from one of the Credit Reference Agencies – TransUnion (formerly CallCredit), Experian and Equifax, for a nominal fee.

To help you understand how good your financial history is, or is likely to be seen in the eyes of a lender you apply to, Credit Reference Agencies will assign you a score based on your history and behaviour. To view this score and get ongoing access to your credit report, you can use a free service such as Credit Karma or Clearscore, which are powered by the information the Credit Reference Agencies hold.

Everything from your mortgage to your mobile phone contract and energy bills can be found on this report – as well as any personal or payday loans you may have taken out. As long as you are making any payments that come due on time and settle your accounts in full, then over time, you should find that this positive financial behaviour contributes towards improvements in your credit score.

What happens to your credit report when you apply for a loan?

When you apply for a loan, the lender will evaluate your credit history and other information, and use this information to determine whether or not to let you borrow money from them. For example, if you apply for a loan with Sunny, our lender panel conducts a credit check and carry out an affordability assessment to decide whether or not to approve your application.

Whether they approve your application, and, in turn, how much they offer to lend to you, is determined by a combination of the information in your credit report and what they believe you can afford to repay. In some cases, they will also need to verify your income, through open banking or a more manual process of uploading payslips to demonstrate your creditworthiness.

How long do payday loans stay on a credit report?

Typically, your report will list the payday loan for six years, if you have kept up with payments as agreed this will simply show future lenders that you paid the loan back in full and closed the account after this.

Lenders are required to regularly report to the Credit Reference Agencies on the status of your account while you’re making payments to show that you’re meeting your obligations.

If you miss a payment, are late with one or if the payday loan account is defaulted – if you haven’t paid in 3-6 months – this will be shown on your credit report, too.

Like positive records in your credit report, a late or defaulted payment will also remain on your credit report for six years from the date it was recorded. Defaults recorded on your credit report will have an impact on your ability to be approved for credit in the future.

Do payday loans affect your credit score and ability to get credit in the future?

In some cases, a payday loan can impact your chances of getting credit in the future.

Mortgage lenders, for example, look carefully at the full length of your credit history available to them, among other things, and if they see one or more payday loans listed in your credit report, no matter how long ago it was, that you once had need of one may cause them to question your ability to manage money and likelihood to keep up with payments on a mortgage.

Of course, all mortgage providers have their own lending criteria and usage of payday loans will be viewed differently between lenders. If you’re unsure of how a particular mortgage provider will view you having used payday loans, then this is something to enquire about with them before putting in a formal application for a mortgage.

How can you avoid taking out a payday loan?

Here are some alternatives to applying for a payday loan, when you need cash fast:

• Use your savings – This is the first place to turn when you need cash fast. Even if you’ve been saving up for something big like a holiday or a new car, it’s better to use money that you already have than take on more credit.
• Borrow from friends or family – This isn’t always the best option but if you have friends or family who have spare cash and can help this could be better than applying for a new loan.
• Sell something to get the cash – While you might begrudge having to sell something valuable, if you can do without it and it gets you the money you need to pay for an emergency it’s a better option than a payday loan.