Yes, payday loans can help you improve your credit score if you get into the rhythm of always paying each month on time, but these are typically very expensive ways to borrow so if you are going to improve your score, there are more effective and cheaper ways of doing it.
Key Points About Building Credit With A Payday Loan
- Payday loans can only benefit your credit score if you pay it back on time, in full, and according to the repayment terms in your contract.
- You can check your credit score with services such as the FICO website or Credit Karma.
- The average US citizen’s credit score is around 698.
- Preferred methods of improving your credit score involve closing down unused credit cards, controlling your debt-to-loan ratio, and not having too many loans at once.
What is a Credit Score?
A credit score is a number between 300 and 850 and reflects how strong your financial history is, and therefore gives a lender an inkling as to whether to trust you with their money. The higher your score, the better, with the average score in the US being 698.
Your credit score is calculated based on a number of factors, such as how many unpaid debts you have, whether you pay back loans on time, and whether you’ve ever declared bankruptcy.
While most lenders will check your credit score and history, it is possible to secure a ‘no-credit-check loan’ if you are particularly worried about it.
How Would a Payday Loan Improve My Score?
Taking out a loan does not automatically improve your score. What does help is making debt repayments on time, and having a loan provides you with the opportunity to do this. This is especially beneficial for those of us with credit scores which are too low to allow us to secure other forms of credit.
Making regular and timely payments demonstrates that you are reliable and capable of paying debt back on time.
Payday loans online should not be used for the sake of improving a credit score. They are expensive loans and can land you with heavy debts if you fail to pay your loan back properly. Rather, you should focus on other means of bettering your score as explained below.
How Else Can I Improve My Credit Score?
Join The Electoral Register
The electoral register provides a record of your name and personal information, allowing lenders to easily verify your identity, making them more likely to lend to you. This will result in a small surge in your score, but it’s helpful and free to do!
Don’t Apply For Multiple Loans At Once
If you’re applying for loans left, right, and center, a lender may perceive you as desperate for cash, and therefore they won’t rely on you to pay back debt.
Your applications will be recorded by a credit reference bureau and your credit score will be adjusted to reflect this risk to other lenders too.
Control Your Utilization Rate
Your utilization rate, or debt-to-loan ratio, is a percentage which shows a lender how much credit you use compared to how much you could use if you maxed out.
For example, if you have a credit card that allows you to borrow $1000 per month and you use it for $100, your utilization rate would be 10%. Credit agencies recommend that you keep your rate at or below around 30%.
If you are struggling with this, you could ask your creditor for an increased credit limit. This means that you will be able to borrow the same amount, but keep your utilization rate lower. For instance, if you have an $1000 credit limit, and have been spending $1000, your utilization rate is 100%. If you increase your limit to $2000, and still spend $1000, you have halved your utilization rate to 50% immediately.
Close Down Unused Credit Cards
Having too many credit cards does not look good on your credit score – since lenders think that you have access to a lot of cash and could use it at any point.
If you need more credit, you could close down credit cards and increase your credit limit on the one (or more) that you retain.
Will Applying Impact My Credit Score?
Applying for a loan with Capital Bean will not affect your credit score. Through using our soft-search approach, we assess your application without leaving a footprint on your record.
Why Might A Payday Loan Negatively Impact My Credit Score?
Payday loans are expensive and high risk loans, and only around 15% of Americans struggle to repay them on time. If you can’t pay back your loan, which is very possible, that would negatively impact your credit score.
While this mires you in debt, it is also problematic for your future, as a low credit score may make it difficult to secure future credit, in the form of a loan, a phone contract, a mortgage, among many other lines of financing.