WILL PAYDAY LOANS HARM YOUR CREDIT SCORE?

Taking a payday loan might seem like a good idea if you’re in a financial bind.  You can get a payday loan regardless of your credit rating since no credit check is required. But that loan can make your bind a whole lot worse, and eventually damage your credit score. 

What’s your credit score?

Your credit score is a rating of your financial health, at a specific moment. It shows how big a risk you are for lenders, compared with other consumers. The credit bureaus Equifax and TransUnion rate you on a scale from 300 to 900. High scores are very good.  Low scores are very bad.  The higher your score is, the lower a risk you are for a lender.

Credit bureaus use a math formula to calculate your credit score. The formula takes into account such factors as:

●How much money do you owe? Have you ever missed a payment on your debts?

●Have you ever had a collection agency pursue you? Have you ever gone bankrupt? Or been in a proposal or credit counselling?

●What is the limit on your credit card? Is your spending always close to your credit limit? Are you only paying the minimum?

Many consumers worry that if they take out a payday loan, it will harm their credit score.   After all, the mere act of applying for a payday loan kind of screams desperation. However, taking out the loan will not hurt your credit score because pay day loan companies do not report to the credit bureaus. But what happens afterwards certainly could!

It can be very difficult to pay off these loans, because they are much more expensive than other kinds of credit.  For example, borrowing $100 for two weeks can cost a fee of $21, which is like paying an incredible 546% annually. You would never take out a bank loan that carried a 546% annual interest rate or use a credit card with that kind of interest rate on unpaid balances.

What if you can’t repay on time?   

If you don’t manage to pay on time – within a week or two -- interest begins to accumulate not only on the principal of the loan but on the unpaid interest. Your interest charges will skyrocket by hundreds and thousands of dollars, depending how late you are in paying. 

The difficulty of paying off the payday loan often results in taking out a second loan in order to pay off the first.  In the U.S., 76% of payday loans are repeat loans, or loans that are being used to pay off the original. 

If you debt spirals out of control and you default on your payday loan, you will be in serious trouble. The lender will pass the loan on to a collection agency. If you are unable to pay when the agency tries to collect, it will report your delinquency to the credit bureaus -- which will almost certainly lower your credit score. A damaged credit score will make it even more difficult to get credit in the future.

Here’s another downer: Payday loans, even if they are repaid on time, do not help repair your credit rating, because the payday lenders do not report to the credit bureaus exceptif you go into collections. 

Most finance companies, however, do report your loan payments regularly to the credit bureaus, and you receive the highest credit rating when you pay on time.  So at loan companies, you are re-establishing your financial credibility.
Prudent Financial offers the best credit repair services and the lowest-cost rates for people with bad credit histories in Toronto and the GTA.  For more information about PRUDENT FINANCIAL SERVICES, visit our web site: http://www.prudentfinancial.net