Payday loans, sometimes called cash advance loans, have become an increasingly popular mechanism to manage your cash flow. As short term loans, they can help you pay your bills or other expenses, when you simply can’t wait up to 14 days for your next paycheck. Naturally, many people have questions about how payday loans might affect their credit score (especially if their credit score is not so good). Fortunately, we’ve got all the answers for you in this short and educational post!
Please note that the information contained in this post is focused on how payday loans may influence your credit score in Canada only. Other countries may have different rules and regulations, as well as different types of credit scoring and credit agencies. Therefore, the background info and answers to the questions posed in this article may not apply if you are outside of Canada.
Background on Credit Scores
Credit scores are extremely important for a wide range of consumer activities. The scores are generated by the two main Credit Reporting Agencies (CRAs) in Canada – Equifax and TransUnion. These scores are based on your credit file – a report of various pieces of information about your credit history, current outstanding loans, payment history, revolving credit (such as credit card balances), and related factors. This information is consolidated into a score, used as a metric to determine your overall risk of defaulting or being unable to pay back, a loan.
The credit score is numeric, and falls on a scale from 300 to 900. In general, credit scores fall into the following range:
- If your credit score is below 599, it needs to be worked on by paying the amount due on all your monthly bills and loan payments on time.
- If your credit score is between 600 and 649, it is considered fair and if you continue to pay your loan payments on time, your score will improve over time.
- If your credit score is between 650 and 719, it is will be reflected as good and it will be easier to get a loan from a financial institution.
- If your credit score is between 720 and 799, you are considered to have very good credit and many financial institutions may actually reach out to you to offer you their services.
- If your credit score is between 800 and 900, you are considered to have excellent credit and will be able to negotiate with the banks for lower interest rates on all your loans including your credit cards.
Scores change over-time, as the information in your credit file changes. The scores between both CRAs might be somewhat different, owing to different data in the file. There are far more fine details about what goes into making a credit score, and what all the various pieces of data in a credit file mean, how much they are weighed, etc. But that’s a whole different blog post. For our purposes, it’s simply important to understand what credit scores are, the reference range of scores, and what they are used for, which is our last topic of background before we talk about cash advance loans specifically.
Credit scores are used for several different purposes. Most commonly, they are used as a reference point, as previously mentioned, to determine creditworthiness or risk to lenders when you are seeking a loan – be it a car loan, a revolving credit facility like a credit card, a personal loan, a mortgage, or any other kind of credit. Lower scores do not necessarily mean you cannot get a payday loan or open a credit card account, though the worse your score is, the less likely you are to secure one, and if you do, it is likely to be with higher interest rates, to offset the greater risk you represent to the creditor. Credit scores are also used as a reference for risk in situations like utility accounts, rental or purchase of property, and similar. Companies like to ensure that you are likely to pay your bill – even a small bill like an electric bill – and often will pull credit reports before opening a service account for an individual.
For these reasons, maintaining as high a credit score as possible is critical to maximizing your potential for lending, and to optimize the rates you will pay in interest. Now, let’s take a look at how quick cash loans use and affect your credit score.
Do Payday Loans Lenders Use My Credit Score?
The simple answer to this question is: it depends. There are many payday loan lenders who do not lookup credit scores or use them in their decision to lend. Many only require pay stubs and personal information, to validate your expected next paycheck, and lend up to the typical limit of $1500 based on your income and desired loan amount. Pulling credit reports is also not free, even for merchants, and many cash advance loan lenders don’t see a reason to spend the fees on a credit score or credit report, when customer-provided paystubs will do.
On the other hand, some companies do pull credit reports or at least credit scores, and use them as one factor among several for determining payday loan eligibility. In addition to paystubs, they may also look at self-reported information such as how long you have worked at your current job, or other documents like bank statements showing your balances, typical monthly or bi-weekly cash flow, and related data. In many cases, the greater scrutiny companies offer, the more likely they are to loan larger amounts of money, as they develop a better financial picture of the customer.
Some customers, however, worry about this process, when they know they have bad credit scores. As noted, many companies do not check credit scores for short term loans, and even those who do go out of their way to make sure it is only one of many factors in their lending decision. So, even if you have bad credit, a quick cash loan may be available to you.
Does a Payday Loan or Cash Advance Loan Affect My Credit Score?
Generally speaking, a payday or cash advance loan does NOT affect your credit score, provided you pay back the loan on time, with all required principal and interest payments. This is largely due to 1) the fact that fast cash loan agencies are not required to report these types of loans to the CRAs, and 2) the short duration (that often gives rise to the alternative name of 14 day loans or loans for 14 days) means that and reporting would be pointless, since by the time the data was added to your credit file, the loan would be paid off and closed.
At the same time, failure to pay back the required principal and interest when due can lead to a negative impact on your credit score and credit file. When you fail to make the required payment, your account will likely be referred to a collection agency. That process triggers reporting to the CRAs, and a derogatory entry on your credit file, which in turn leads to a decrease in your credit score. So, put simply, a payday loan will not affect your credit score, so long as you pay it off as required.
Can a Short Term Cash Advance or Payday Loan Help My Credit Score?
On the flipside of things, a short term cash advance loan or payday loan in Canada cannot directly help your credit score. This is for the exact same reasons as above – there is no interaction with your credit score or credit file, and no reporting to the CRAs, unless your account goes to collections (and that certainly won’t help your credit score). Taking out a short term loan from a direct payday lender, and paying it back on time, will not result in an improvement of your credit score, because it will never be recorded in a credit file. However, there are still ways you can use fast cash loans to improve your credit score.
Many people use cash advance loans as a way of managing their cash flow from paycheck to paycheck. If you routinely are late paying your bills, because you live paycheck to paycheck, and your pay period doesn’t line up well with when your bills are due, this can negatively impact your credit score. Late payments on accounts are recorded by the CRAs, and do play a role in your credit score. So, if you can avoid late payments or missed payments by taking out a cash advance loan, this can have a positive effect on your credit score. In the long run, you might even end up paying less money out of pocket, despite the addition of interest on the payday loan. This is due to the fact that improving your credit means you will likely become more and more eligible for traditional types of credit and loans, which often have lower interest rates than short term loans.
That’s really the beauty and utility of cash advance loans – they are designed to let you better manage your cash flow, to pay your bills and keep things going. If you can utilize them to avoid events that would trigger negative reporting on your credit report, and still pay them off on time (to avoid the payday loan itself from becoming a negative on your report), then you can most definitely, indirectly, use these short term loans to improve your credit score.
Where Can I Get a Cash Advance Loan Online?
By now, you might be wondering where you can get one of these payday loans, and whether or not you can get a fast loan online. The good news is there are direct payday loan lenders online who offer high-quality loans and exceptional customer service, including the ease and convenience of a 5 minutes e-transfer payday loans, applied for, approved, and transferred entirely online.
One of the best companies for this purpose is icash.ca. Base in Ontario, iCASH is a licensed direct lender that offers honest and reliable short-term loans online, at your own convince and has a reputation for excellent customer service, and instant approvals.
iCASH is the only one in Canada to offer multiple repayments options on your Payday Loan. You can repay your loan in 3 flexible payments all with the convenience of doing everything online – it is 2018, after all! Check them out if you need apply for a short term loan online.
For more information on how payday loans work, you can also check out the PayDay Loan Frequently Asked Questions section from the aforementioned iCASH website, which we’ve directly linked to here for your convenience!