{"id":353985,"date":"2023-01-10T13:36:09","date_gmt":"2023-01-10T20:36:09","guid":{"rendered":"https:\/\/www.creditrepair.com\/blog\/?p=353985"},"modified":"2023-01-10T13:36:12","modified_gmt":"2023-01-10T20:36:12","slug":"payday-loans-hurt-score","status":"publish","type":"post","link":"https:\/\/www.creditrepair.com\/blog\/lending\/payday-loans-hurt-score\/","title":{"rendered":"Can payday loans hurt my credit score?"},"content":{"rendered":"\n
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Disclosure regarding our editorial content standards.<\/a><\/p>\n\n\n\n

If you\u2019re in a position where you\u2019re strapped for cash, you might be considering a payday loan. Most people understand that a payday loan comes with its disadvantages. Still, if you need money now, it can feel like the only option. <\/p>\n\n\n\n

First, however, it\u2019s essential to understand all the potential consequences of a payday loan\u2014like that it can hurt your credit.\u00a0<\/p>\n\n\n\n

What is a payday loan?<\/h2>\n\n\n\n

A payday loan, also known as a cash advance loan, is a short-term, high-interest loan based on your income. The loan is typically for a small amount, around $500 or less on average. <\/p>\n\n\n\n

Payday loans usually work as a way to borrow from your next paycheck. Because the arrangement expects you to pay the money back using your upcoming paycheck, the loan term is usually just a few weeks long (usually two weeks or one month). <\/p>\n\n\n\n

The entire process of getting the loan takes only a few minutes, which is another reason it\u2019s so tempting for people in a financial emergency. First, the payday lender verifies your income to make sure you can repay the loan. Next, they verify your bank account so they can deposit the funds. <\/p>\n\n\n\n

Once you\u2019re approved for a loan, the funds will be deposited into your account. <\/p>\n\n\n\n

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You\u2019ll also have to sign two post-dated checks for the loan amount and the interest on the loan. These checks will coincide with your next payday so the lender can get their money back quickly. <\/p>\n\n\n\n

The majority of people who take out a payday loan have poor or little credit. As a result, payday lenders charge incredibly high APRs and take post-dated checks for repayment to offset the risk of lending to people with bad credit. <\/p>\n\n\n\n

Even in an emergency, payday loans are usually not the best option. The Consumer Financial Protection Bureau (CFPB) refers to payday loans as \u201cdebt traps\u201d<\/a> and encourages consumers to be aware of the risk of payday loans. <\/p>\n\n\n\n

Many states have passed regulations to minimize the damage payday loans can do. <\/p>\n\n\n\n

Payday lenders understand their borrowers are in a vulnerable situation and take advantage of this with extremely high interest rates.<\/p>\n\n\n\n

Do payday loans affect your credit?<\/h2>\n\n\n\n

In theory, a payday loan could help your credit if you paid it back on time and the lender reports to the credit bureaus. However, most people don’t manage to do that, and many payday loan lenders don’t report timely payments anyway.<\/p>\n\n\n\n

The average payday loan borrower remains in debt for five months. This is because nearly 60 percent of payday loan borrowers<\/a> have trouble meeting their monthly expenses. Around 70 percent of borrowers use the funds to pay recurring bills like utilities and rent.<\/p>\n\n\n\n

If you’re taking out payday loans to make ends meet, you’ll likely have trouble repaying the amount. Late payments can reduce your credit score. If you default, the payday loan could hurt your credit even more.<\/p>\n\n\n\n

What to do about a payday loan in collections<\/h2>\n\n\n\n

If your payday loan goes to collections, it\u2019s important to make a plan of action as quickly as possible. Consider contacting the collection agency and negotiating your debt down if you pay it all up front. <\/p>\n\n\n\n

Debt collectors often offer individuals a discount if they agree to make one large payment to get rid of the debt. <\/p>\n\n\n\n

Make sure you educate yourself on how to negotiate with and pay a collection agency. Get everything in writing, and avoid giving them direct access to your bank account. <\/p>\n\n\n\n

Note that if you go this route and negotiate, the debt will show as \u201csettled\u201d rather than \u201cpaid in full\u201d on your report. Of course, \u201csettled\u201d isn\u2019t as good for your credit report, so you\u2019ll have to evaluate if this distinction is worth the money you save on the debt. <\/p>\n\n\n\n

Regardless of how you pay off the collections charge, the negative item can stay on your report for up to seven years.<\/p>\n\n\n\n