Do payday loans affect your credit

do payday loans affect your credit

Do payday loans affect your credit score? They can! Just like any loan, payday loans can positively or negatively affect your credit score, depending on how you handle them. 

Here, you will learn more about payday loans, how they can affect your credit score, and how you can protect your finances from harm.  

What Is a Payday Loan? 

A payday loan is a kind of quick cash loan designed for people looking for extra funding when in between paychecks. Both brick-and-mortar and online lenders offer payday loans, making them an accessible option for just about anybody. However, once you learn a bit more about payday loans, they may not be as convenient as they seem. 

Payday loans are often referred to as cash advance loans. This term refers to the expectation that payday lenders have for borrowers to pay back their loans at the time of their next paycheck. Since payday loans have such a quick turnaround time, loan amounts typically stay fairly low. But, a loan from a payday lender may not work the best as cash advances. Borrowers who don’t repay a payday loan within two weeks or less are usually stuck with high-interest rates, making the loan harder and harder to pay off as time goes on. 

Unsecured vs. Secured Loans 

Commercial funding typically comes in two different forms: secured and unsecured debt. Secured credit, also called a secured loan, requires borrowers to offer collateral in order to lock down funding. Collateral is a piece of property containing sufficient equity that acts to secure loan funding, often for people with lower credit scores. 

Unsecured credit, also called an unsecured loan, doesn’t require borrowers to offer any kind of collateral. Borrowers with credit scores on the lower side may consider requesting a cosigner in order to receive funding approval or higher loan amounts. 

Since fast payday loans are unsecured loans, borrowers do not have to offer any property as collateral. 

How Can a Payday Loan Affect My Credit?

Do payday loans hurt credit? The impact a payday loan may have on credit depends on the borrower’s payday loan history. For example, people who pay off their payday loans right away (within about fourteen days or less) may see little to no change in their credit reports. Alternatively, consider borrowers struggling with the inconvenient rates and terms of payday loans. They may have accumulated a few late payments and fees while paying off their payday loan. These borrowers may also see that their amount of debt has significantly increased. In this case, you may find that payday loans have negatively affected your credit scores. 

Below are more details about what goes into determine your credit score: 

FactorDescriptionWhat Can HurtHow to Improve
Payment HistoryYour track record of making timely payments on loans and credit cards. – Late or missed payments. – defaulting on loans.- Bankruptcies.  – Always pay on time. – Set up automatic payments or reminders. -Address missed payments ASAP. 
Credit UtilizationThe ratio of your current credit card balances to your credit limits. – Using a high percentage of your available credit.- Opening several new accounts in a short time.  – Keep balances low. – Pay off debt rather than moving it around. – Don’t close unused cards (unless they have fees). 
Length of Credit History The age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts. – Closing old credit accounts. – Opening several new accounts in a short time. – Keep old accounts open. – Avoid opening multiple new accounts in quick succession. 
Types of Credit UsedThe mix of credit accounts you have, such as credit cards, mortgages, and installment loans. – Having only one type of credit account. – Diversify your credit portfolio if possible (e.g., credit card, car loan, mortgage).- Don’t open accounts just to have a better mix; it might not help and could hurt your score. 
New CreditThe number of recently opened credit accounts and the number of recent inquiries into your credit report. – Opening many new accounts in a short time. – Multiple hard inquiries in a short period. – Only apply for credit when necessary. – Space out credit applications. – Understand that soft inquiries (like checking your own score) don’t hurt your score. 
Public Records and Collections Bankruptcies, tax liens, or collection actions on your credit report. – Having any of these negative records. – Pay off any outstanding debts or liens. – Work with creditors to remove negative marks. – Consider seeking legal advice if facing bankruptcy or other serious financial issues. 
Credit Inquiries When lenders check your credit report, either for a hard inquiry (like a loan application) or a soft inquiry (like a background check).  – Too many hard inquiries in a short time. – Limit hard inquiries by only applying for necessary credit. – Check your own credit score regularly. 

Unfortunately, just one late payment on a payday loan can leave a negative mark on your credit history for up to seven years, and you may not be able to remove a payday loan from your credit report. Furthermore, payday loans that get out of control can also leave borrowers at risk of having a delinquent account sent to a debt collector. 

To stay on the best terms with the three major credit bureaus, you should only consider a payday loan if you can pay the funding off within a couple of weeks. If not, you should look into another form of funding. 

How Can Bad Credit Affect Borrowing?

When lenders review applications for loan approval, they look into the borrower’s credit history, credit reports, and credit score. If they find poor credit, no credit, or past bankruptcy, this may affect their decision to approve the application. Some negative side effects you may experience if you are looking for a loan with bad credit are: 

  • Lack of options 
  • Low loan amounts 
  • High-interest rates 
  • Inconvenient payback terms 

To find the best deal, it is essential to either work on boosting your credit score or try working with a lender who specializes in bad credit loans

Pros and Cons of Payday Lenders

Consider some of the pros and cons of working with payday lenders. 

Payday Loan Pros

No Bank Account Required 

While many loan types require borrowers to have a bank account, payday loans do not. You can cash a payday loan at a currency exchange or receive your approved funds on a prepaid debit card. Both of these options allow borrowers to get their payday loan funding without having a bank account. 

Easy Application Requirements

Payday loans are known for being a simple and easy form of funding. This is because borrowers are often able to receive approval without divulging too much personal financial information. Most payday lenders just require basic financial information before they provide an application with instant approval. 

Quick Funding

Borrowers are often able to receive their payday loan funding just hours or even minutes after receiving approval! 

Payday Loan Cons

Below are some of the disadvantages of payday loans. 

Extremely High-interest Rates 

Payday loans almost always come with extremely high-interest rates, making these loans a very expensive form of funding. On average, people who take out payday loans will spend about $520 just to borrow $375.1  In fact, interest rates on payday loans can get so high that your balance may actually increase from month to month.  

Inconvenient Payback Terms

The payback terms for payday loans are also quite short. Typical terms for payday loans are about two weeks or less. 

Very Low Loan Amounts

Since payday loans have such brief terms, borrowers are usually only paired with very low loan amounts. If you are looking for more than a few hundred dollars, payday loans are probably not the right choice for you. 

How Can I Repair My Credit After a Payday Loan?

After getting out of payday loan debt, it may be a good idea to focus on getting your credit back on track. There are even things you can do to help credit when you are in the middle of paying back payday loans. 


Payday loan borrowers who are struggling to keep up with their current payback schedule have the option to refinance. With a refinancing, lenders take a borrower’s initial loan and roll it over into a brand new contract. You could refinance your payday loan to get potentially lower rates, extended terms, and even more funding. From there, making on-time payments should be manageable and stress-free.

Focus On Paying off Other Debts

What if you paid off your payday loan but are still struggling to boost your credit? In that case, you may want to focus on any other forms of debt you may have. Work towards paying off accumulated debt should increase your debt-to-income ratio, which should, in turn, help boost credit. 

Check Your Credit Reports Regularly 

To maintain your financial health, conduct credit checks often. Remember that you don’t always need an official credit report from one of the major credit bureaus to see how your credit is doing. You can perform a soft credit check any time you like without penalty to your overall credit. Most online bank or credit card accounts give users access to their current FICO score and major credit history data. 

Better Loans Options if You Don’t Want to Work With a Payday Lender

Don’t think a payday loan is right for you. Don’t worry! There are a plethora of other loan options you can choose from! 

Bank Loans

If you already have good credit, you may be able to get a quick loan from a bank. Banks are known for being strict traditional lenders who only accept applicants with excellent credit. So, if you are on a journey toward improving a bad credit score, you may not be able to get a loan with a bank just yet. 

Credit Union Loans

Depending on your profession, the area you live in, and a few other financial factors, you may be able to turn to credit unions for a loan. Credit unions are niche financial institutions that are owned by borrowers instead of profit-seeking investors. Because of this, you are more likely to find special borrower perks and deals when you go with a credit union. 

But, before you apply for a credit union loan, make sure you meet their unique requirements. 

Personal Installment Loans From a Direct Lender

If you are looking to find a loan and rebuild credit at the same time, you may consider personal loans from a direct lender. With a personal installment loan, funding is delivered in one lump sum and then paid back in equal installments. Since payments are divided up evenly, planning your payback schedule for a personal loan can be quick and easy. 

Types of Loans To Avoid

When going through your loan options, you may come across some types of funding that appear convenient but will probably just end up worsening your financial situation. Two such funding types are car title loans and car title pawns. With car title loans, borrowers give up partial ownership of their vehicle in exchange for funding. If they default on their loan, they run the risk of having their vehicle repossessed by their car title loan lender. 

With car title pawns, borrowers must physically give up their vehicle in exchange for funding. Then, if they aren’t able to pay back their loan, they never get their car back. 

Payday Loan And Credit Score FAQs

How do cash advances from credit card companies differ from payday loans?

Cash advances are short-term loans you take against your credit card’s limit, while payday loans are typically standalone loans from lenders. Credit card companies usually charge a fee and higher interest rates for cash advances than regular purchases. It’s essential to understand the terms before taking a cash advance from your credit card issuer.

Can taking cash advances from my credit card affect my credit report?

Yes, taking cash advances can impact your credit report. When you take a cash advance, it increases your credit card balance. If this balance becomes significantly high relative to your credit limit, it can negatively affect your credit utilization ratio, a key factor in your credit report.

Do credit card issuers view payday loans differently than other types of debt on my credit report?

Some credit card issuers might view payday loans as evidence of financial distress since these loans are often sought by those facing financial challenges. If a payday loan is reported to credit bureaus, and you manage it responsibly, it might not be a significant issue. However, missed payments or defaults will negatively impact your credit report.

How does the interest rate on payday loans compare to that of cash advances from credit card companies?

Payday loans generally have significantly higher interest rates compared to cash advances from credit card companies. While cash advances might have a higher interest rate than regular credit card purchases, payday loans can often have annual percentage rates (APRs) in the triple digits.

If I pay off a payday loan using my credit card, will it improve my credit score?

Paying off a payday loan using your credit card will reduce your outstanding payday loan debt, but it will increase your credit card balance. If this results in a high credit utilization ratio on your card, it might negatively affect your credit score. It’s essential to consider the impact on both your payday loan and credit card balance before making such a decision.

Can I negotiate the interest rate on my payday loan like I can with credit card companies?

While credit card companies might sometimes be open to negotiating interest rates, especially for long-standing customers with good payment histories, payday lenders are typically less flexible. However, it never hurts to ask, especially if you’re facing financial hardship.

How long does it take for a payday loan to reflect on my credit report and potentially affect my credit score?

If the payday lender reports to the major credit bureaus, the loan and your payment history can appear on your credit report within one to two months. Any missed payments or defaults will negatively impact your credit score once reported.

CreditNinja’s Thoughts

Payday loans may look like a quick and easy option on the surface, but they are filled with inconveniences that may end up having a detrimental effect on your credit. Instead, you may want to set yourself up for success with another funding type. CreditNinja suggests solutions like: 

  • Using funds from your own savings account
  • Asking a trusted friend or close family member for a small short-term loan
  • Getting a temporary part-time job to earn extra cash

If these solutions aren’t available, and you find yourself in an emergency situation where you need cash right away, consider a personal installment loan from CreditNinja. CreditNinja seeks to be a more affordable solution to predatory financial institutions like payday lenders! 


  1. Payday Loan Statistics for 2023 | Balancing Everything
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