Many people turn to payday loans, when faced with a financial emergency. Others borrow the money to cover expenses such as credit card bills and utility payments. These high-interest loans, which are typically easy to get, don’t affect your credit score when you apply. However, in the event you find it difficult to repay the money, your score is definitely affected… and not in a good way.
Post-Dated Check Woes
Payday lenders require the borrower to write a post-dated check to cover the total amount of the loan. This aids in ensuring that repayment is on time and paid in full. Problems occur when the check is cashed and there isn’t enough money in the borrower’s bank account to cover it. More times than not, this results in a defaulted loan. Unpaid loans have a negative effect on a credit score.
If and when you fall behind on your loan, contact the lender as soon as possible. Sometimes, if you’re lucky, lenders allow you to opt for a payment plan. Obviously, this will add more interest and/or fees. But, the upside is the fact that it temporarily stops the loan from defaulting, which is even worse for your credit score.
(It should be noted that some lenders simply don’t allow any changes, in regard to loan payments. If you fall behind, it’s your problem. For this reason, always ask about this policy BEFORE taking out a loan with a specific lender.)
Getting Back on Track
Once you fall behind on a payday loan payment, it’s very hard to recover financially. The longer the loan remains unpaid, the more detrimental to your credit score. Consider the following tips, to get you back on track to paying off this debt as quickly as possible:
- borrow the money from a friend or family member
- have a garage sale
- pawn some of your belongings
- offer services such as babysitting, tutoring or housecleaning
- consider a payday loan consolidation company
While it’s true you may find it difficult to borrow money from someone you know, it’s a much better alternative than a past-due payment. Remember, everyone needs a little help occasionally, no matter how self-sufficient they are.
Effect on Mortgage Applications
It’s been suggested by some that payday loans affect your ability to get a mortgage. In 2012, Experian started collecting payday loan information. Equifax began doing so in 2013. Even though this data doesn’t generally appear on a standard credit report, no one can be certain if it has any bearing on obtaining a mortgage. Many times it’s up to the mortgage lender.
Monitor Your Credit Score
People who don’t monitor their credit score, on a regular basis, are doing themselves a big injustice. Why? The answer is simple… credit fraud. Paying close attention to your score not only keeps you informed of fraudulent activity, it’s also the best way to learn that your score has improved.
Although chances are quite slim, it’s not unheard of for a payday loan to boost your credit score slightly. And, in this case, every little bit helps!