Good to Know: Payday Loans Can Impact Your Credit Score
Many people are uncertain if payday loans help your credit rating. In most cases, if you pay them back on time, the Consumer Financial Protection Bureau says it will not have a beneficial effect on your credit score. If you fail to make a payment and default on your loan, however, expect your score to drop. Payday lenders only report to the major credit bureaus if your loan goes into default and is sent to collections.
Better Ways to Increase Your Credit Score
If you plan to use a payday loan to improve your credit rating, there are better options. Apply for a credit card with a store, such as Amazon. Purchase small items, such as a television, and pay off the balance over the span of a year. Make sure you can afford the minimum payment. Making the payments on time improves your score. It is important that you not purchase additional items and charge more than you can afford to pay back. Using it once and then cutting up the card is a good way to avoid splurging.
Another idea is to talk to your bank or credit union about a small loan that you pay back over time. Banks and credit unions offer lower interest rates and fees, and while payday loan companies do not report your loan to credit bureaus, banks and credit unions do. A secured loan using the money in your savings as collateral is a good way to get this type of loan.
Payday loans have their place, especially if you need cash and can pay it back as soon as your paycheck arrives. If you're taking one out solely to raise your credit score, it's not going to help.