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How To Remove Payday Loan From Credit Report

Everybody experiences their fair share of financial rough patches. When money is tight, you might be worried about where you are going to find the money to cover your bills until your next paycheck. In times like these, it’s easy to feel desperate for any kind of help, and it can be difficult to be properly discerning in who you borrow money from.

If you have taken out a short-term loan like online payday loans or cash advance loans, you might be curious as to how this might impact your personal credit report. You might also wonder whether it is possible to have a payday loan removed from your credit history so you can start fresh. 

Payday loans can be a tricky subject in the world of personal finance as state laws differ considerably, and not all lenders are the same. Your credit reporting will be sure to include your payday loan, but a better understanding of how they are interconnected and what exceptions exist could be exceedingly helpful in navigating this challenging time.

What Are Payday Loans? 

A payday loan, also referred to as a two-week loan or loan in advance, is a short-term personal loan with high-interest rates usually meant to be repaid with your next paycheck. Since approval for payday loans is primarily based on your income, your credit score is not as central to qualification as it is for other personal loan options. 

The principal amount for payday loans is typically between $150 and $1,000. Payday loans tend to be incredibly high cost as they are unsecured and short-term loans. A payday loan should only be relied on as a last resort option. Additionally, you should do your research on the payday lender you are considering, as many payday lenders can be predatory.

Predatory Payday Lenders

Changes to state law have been made over the years to crack down on predatory payday lenders. There are now myriad regulations in place to protect payday loan borrowers from falling into a debt trap. 

As of 2021, 16 states and the District of Columbia have banned payday loans. It is essential to ensure that your payday lender is operating legally in your state. If you received a payday loan from a payday lender that was operating unlawfully, you could have that payday loan removed from your personal credit report. 

That being said, not all payday lenders are predatory, and not all payday loans are unequivocally wrong. Certain circumstances might require quick, short-term funding. And some payday loans offer an extended payment plan with more reasonable interest rates, making timely payments easier.

What Is Included in Credit Reports?

Three credit bureaus compile your credit reports: TransUnion, Experian, and Equifax. All credit card companies and lenders with which you have a credit account will report to the credit bureaus. There are some exceptions depending on the lender. 

Credit bureaus will include your account information, credit inquiries you’ve made, personal details to connect you to your credit file, and public records or collections on your credit report. The payday lender will likely report your payday loan debt to each credit bureau to be included in the credit accounts section of your credit report.

Credit Scores

Credit scores are three-digit summaries of the information on your credit report. The most popular credit score for easy credit checks by lenders is the FICO score. Your FICO score is broken down into five categories that account for various percentages in the calculation.

  • Payment History (35%)
  • Amounts Owed (30%)
  • Age of Credit History (15%)
  • New Credit (10%)
  • Credit Mix (10%)

Missed payments on your payment history or a negative entry from a debt collector will cause your credit score to drop considerably. A poor credit score will make it harder for you to qualify for a personal loan, get approved for an apartment you want, or access a limit increase from your credit card issuer. 

How Do Payday Loans Affect Your Credit Report

Payday loans more often than not show up on your credit report. Any new credit account that is reported to the credit bureaus will have some kind of impact on 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 could build your payment history, which will improve your credit score. Consistently making late payments on your payday loan will reflect poorly on the lender’s credit reporting. Before taking out a payday loan, make sure that you can afford the payments, so you don’t accidentally harm your credit. 

Payday Loan Defaults

Payday loan borrowers defaulting on their loan will result in adverse credit reporting, which could severely damage their credit score. If you have trouble paying your payday loan payments, you must attempt to find a solution with the lender rather than reverting to non-payment. Be honest with the loan company; they may offer an extended payment plan to avoid you defaulting or filing bankruptcy. 

Is It Possible to Remove a Payday Loan From Your Credit Report?

In most cases, it is not possible to remove payday loans from your credit report. Defaulting on the payday loan might lead to a collection account which will also be reported to the credit bureaus 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 bureaus.

The one exception that could allow you to remove payday loans from your credit report before the set time is if your lender acted unlawfully or the payday loan itself was illegal. In this unique instance, you can dispute the information.

Disputing Information on Your Credit Report

According to the Fair Credit Reporting Act, as a consumer, you have the right to dispute incorrect or unlawful information on your credit report. You can dispute the information and file a complaint about the information furnisher to the credit bureaus. 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 credit 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 you can. After lowering your credit card balances, keep the accounts open, so your available credit remains high. Decreasing your credit utilization 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 credit report you can receive once a year from all three credit bureaus. Checking your report often will enable you to catch any inconsistencies and errors before they have a chance to damage your score. Also, reading your report will help you better understand what benefits your credit and what harms it allowing you to make a more significant positive impact.

Stop Applying for New Credit

Take a break from applying for new credit. Avoiding applications for a new credit card or a personal loan will put a halt to hard inquiries on your report. Too many hard inquiries in a short period of time usually result in a score drop. If you need to borrow some money, consider asking family members or friends.

Start Budgeting Monthly Expenses

It can be stressful to feel like you are always reaching the bottom of your bank account at the end of every month. Living paycheck to paycheck is not suitable for anyone, and it can feel like there isn’t much you can do to change it. However, it can’t hurt to try budgeting your 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. If your checking account still feels unbearably light, consider asking for a raise or taking on a side hustle. There are options available to you, but sometimes you need to think outside the box. 

Patience and consistency are the keys to rebuilding your credit after derogatory marks like defaulting on payday loans. Your score will not magically double overnight, but if you keep putting in the necessary effort, you will see the fruits of your labor in time. 

What Happens If I Stop Paying My Payday Loan? – Experian