About 12 million Americans use payday loans every year.1 If you have recently taken out online payday loans or cash advance loans, you might be curious how this might impact your credit report. You might also want to know if removing a payday advance loan from your credit history is possible.
What Are Payday Loans?
A payday loan, also referred to as a two-week loan or cash advance, is a short-term personal loan. These short-term loans tend to be incredibly high cost as they are unsecured. A payday advance should only be relied on as a last-resort option. You should research the payday lender if you are considering getting a payday loan in another state, in person, or online, as many payday lenders can be predatory.
An Overview of Payday Advance Loan Terms
|Average Interest Rate||Typically between 300% to 500% APR, but can be as high as 700% or more in some cases.|
|Loan Amount||Usually between $150 and $1,000.|
|Loan Term||Generally two weeks, aligning with the borrower’s next payday.|
|Fees||Fees can range from $10 to $30 for every $100 borrowed.|
|Rollover Fees||If a borrower cannot repay the loan by the due date, they might roll it over, incurring additional fees.|
|Impact on Credit Score||Can positively or negatively affect credit score depending on repayment behavior.|
|State Regulations||Vary by state. Some states have banned payday loans, while others have set limits on interest rates.|
|Repayment||Typically a post-dated check or authorization to withdraw money from the borrower’s bank account.|
|Qualification||Mainly based on income. Credit score is not central to qualification.|
|Use Cases||Intended for emergency expenses, not long-term financial solutions.|
|Risks||High interest rates, potential for debt traps, and predatory lending practices by some payday lenders.|
Predatory Payday Lenders
As of 2021, 16 states and the District of Columbia have banned payday loans.2 It is essential to ensure that your lender operates legally in your state. If you received a cash advance loan from a payday lender operating unlawfully, you could have that loan removed from your personal report.
How Do Payday Loans Affect Your Credit Report
Payday loans, more often than not, show up on your report. Any new credit account reported to the bureaus will impact your credit report, whether for good or bad. Payday loans have the potential to positively or negatively affect your credit, depending on how you handle the payments.
Paying Off Your Payday Loan
Making all your monthly payments on time for your payday loan debt could build your payment history, improving your credit file. Missed payments on your payment history or a negative credit entry from a debt collector will cause credit scores to drop considerably.
Payday Loan Defaults
Payday loan borrowers defaulting on their loans will result in adverse credit reporting, which could severely damage their credit scores. Talk with your lender because they may offer an extended payment plan.
Is It Possible to Remove a Payday Loan From Your Credit Report?
In most cases, removing payday loans from your report is impossible. Defaulting on the payday loan might lead to a collection account which will also be reported to the credit reporting agencies by the collection agency.
When the full debt has been repaid or charged off through a decision to file bankruptcy, you will need to wait until the payday loan falls off your report after a certain number of years. If the adverse information about the payday loan remains on your credit report longer than it should, you can have it removed by contacting the credit bureau.
Disputing Information on Your Credit Report
According to the Fair Credit Reporting Act, you can dispute incorrect or unlawful information on your financial report as a consumer. You can dispute the information and file a complaint. Report any illegal lending practices or identity theft to the Federal Trade Commission.
How To Rebuild Your Credit History
Suppose payday loans have damaged your credit score. How do you go about recovering from a payday loan gone wrong? How can you rebuild your financial history after negative marks from a payday loan?
Here are some strategies to build your credit score again so you can work towards a healthier and brighter financial future:
- Reduce Your Credit Utilization — Reduce your overall credit utilization ratio by paying down as much credit card debt as possible. Decreasing your revolving debt to under the recommended 30% can do wonders for your credit score surprisingly fast.
- Check Your Credit Regularly — Review your credit regularly with the free report you can receive once a year from all three bureaus. Knowing how to read a credit report will enable you to catch any inconsistencies and errors before they can damage your score.
- Stop Applying for New Credit — Avoiding applications for a new credit card or a personal loan will put a halt to hard inquiries. Too many hard inquiries in a short period usually result in a FICO score drop.
- Start Budgeting Monthly Expenses — Dividing out your income to cover your bills and cutting down on unnecessary expenses could increase your chances of having money left in your bank account at the end of the month.
FAQs on Credit Bureaus and Consumer Reports
Reviewing your credit report at least once a year is a good practice. This helps ensure that all the information is accurate and allows you to spot any potential signs of identity theft or fraud.
If you discover an error, you should immediately report it to the respective credit bureau. They are obligated to investigate and correct any inaccuracies. This is crucial, especially if the error negatively impacts your credit record.
If you have an unpaid debt that’s handed over to a debt collection agency, it can hurt your report. This mark can stay on your report for several years and may make it challenging to borrow money in the future.
A credit limit is the maximum amount of money you can borrow on a credit card or line of credit. It’s determined by the lender (often a bank or credit union) based on your creditworthiness, income, and other factors.
You might have a thin or non-existent file if you’ve never borrowed money or had a credit card. However, other factors, like rent payments or utility bills, might be reported to the credit bureaus, contributing to your credit record.
A Word From CreditNinja on Your Credit Reports
Patience and consistency are the keys to rebuilding your credit after derogatory marks like defaulting on payday advance loans. If you want further information on how to build good credit, check out CreditNinja’s free finance blog!