Do Payday Loans Affect Credit Score?

It is true that 76% of South Africans rely on payday loans, and they are a really good option for accessing money quickly during financial emergencies. Even for those with limited or bad credit histories, payday loans seem like a viable solution for getting immediate funds without hassle.

Payday loans, while more convenient than other cash options, have a darker side. Some experts argue that these short-term, high-interest credit forms can pave the way to future financial instability. While this may not be the whole truth, it’s essential to comprehend how payday loans can influence your credit score before making a decision.

This guide, prepared by the RandHub team, showcases every aspect, like whether payday loans affect your credit score and, if yes, how you can escape from it.

Quick answer: Payday loans can affect your current credit score in both positive and negative ways. If you timely make payments on your loan, it could improve your score, while failure to make repayments could negatively harm it.

Do Payday Loans Affect My Credit Score?

Payday or other short-term loans do not negatively affect your credit score until you pay them back on the agreed-upon time and in full. Most South Africans with bad credit history are turned to payday loans to get cash help as they can’t get a loan from elsewhere.

Payday loans are short-term financing, but they are offered at high interest rates and shorter repayment periods. Mostly, people use them to fill the financial gap until their next payday. If you’re effectively planning them and have a stable source of income, they could be an ideal credit option.

However, if not managed correctly, they could risk getting trapped in a cycle of debt. Additionally, high rates and fees sometimes make it challenging to repay payday loans on time, which will be a red flag for your credit score.

Will Payday Loan Show Up on Credit Report?

Yes, payday loans in South Africa are included in your credit report. S&P Global Ratings (S&P), Moody’s, and Fitch Group are three major credit rating agencies registered by the FSCA to manage and issue credit ratings in South Africa.

A credit rating report generally provides an overall record of your credit history and borrowing activities, so your payday loans are also included in it.

Can Payday Loans Improve My Credit Score?

It depends on you. A payday loan could help you build your credit score if you make repayments on agreed time. Continuous repayments of your loan show good credit management, which shows other lenders that you’re a reliable and responsible borrower.

On the other hand, if you miss repayments or default on your payday loan, they are reported to South African major credit rating agencies, which negatively impacts your credit score. As a result, it lowers your credit rating and future loan opportunities.

Making repayments on time also stays on your credit rating report, which increases your chances of getting a loan with easy approval and at lower rates.

What Impact Could a Payday Loan Have on Your Credit Report?

Your credit report’s perception of payday loans varies based on each lender’s independent assessment. Some lenders see payday loans as a red flag that indicates you had major financial problems- and they might assume you are risky and reject your application.

Conversely, some lenders will work with you even if you have a recent payday loan on your credit file. Such lenders usually focus on other factors like your income, payment history, and debt-to-income ratio (DTI).

In the end, lenders’ views about payday loans are unique and independent. Before applying for a new credit, always ensure that you check the basic eligibility criteria. Often, comparing payday loans also makes it easier to get approval at affordable rates and terms.

How Long Will Payday Loans Affect Your Credit?

If you pay off your payday loan on time in full with no issues, it will remain on your credit file for up to 6 years. It depends totally upon which credit rating agency has compiled your report in South Africa.

Credit reports don’t indicate whether your loan application was approved or not, but they do record your loan repayments, which have a permanent place on your credit file. Therefore, it’s essential to apply for a loan only when you’re confident about repaying it.

Remember, if the payday lender approves your loan application, the loan could remain active on your credit report for up to six years after settling the debt.

Can I Get a Payday Loan with Bad Credit?

Contrary to popular belief, there is a real possibility that you could be eligible for a payday loan in South Africa, even if you have a less-than-ideal credit rating. It’s important to note that a responsible lender may perform a soft credit check on you, but rest assured, it won’t appear on your credit file.

Payday loan companies often place a high value on your financial stability over a bad credit history. They are more interested in your ability to repay the loan, making payday loans a viable option for those with less than perfect credit history.

It’s crucial to understand that payday lenders have their unique ways of assessing applications. While there’s no 100% guarantee of approval for a payday loan with bad credit, having a clear understanding of the process can significantly empower you to make an informed decision.

How To Improve Your Credit Score with Payday Loans?

• Try not to take out too many payday loans: Once you have fully repaid your current payday loan, relax for a while before taking another one. Taking several payday or short-term loans indicates to lenders that you are not financially stable.
• Be mindful of your credit applications: Each time you apply for new credit, lenders review your application and conduct a credit check, leaving a mark on your credit report. A high number of applications within a short period can be viewed as a red flag by other lenders, potentially reducing your chances of approval. This underscores the importance of managing your credit applications responsibly.
• Make your repayments in full and on time: Your repayment history plays a significant role in your credit file. This underscores the importance of settling your payday loan repayments on time. Remember, credit rating agencies like Moody’s, S&P Global, and Fitch Ratings in South Africa record missed or late payments on your credit file, which could be seen by lenders. By making timely repayments, you’re actively building a positive credit history.
• Make a habit of regularly checking your credit file: Before making a payday or any other loan application, check your credit file for errors or missing information. Lenders and credit companies always prefer faultless credit files.