How Payday Loans Affect The Credit Score?

Payday loans are small, unsecured personal loans with short repayment windows. You can obtain them from online lenders or physical storefronts. These loans typically offer rapid funding—often on the same day you apply—and are commonly used to cover immediate needs like utility bills, groceries, car repairs, or minor financial emergencies.

Unlike traditional financial institutions, payday lenders rarely perform a hard credit inquiry during the application process. This creates confusion regarding how—or if—payday loans influence your credit score.

Before you commit to a payday loan, here is what you need to know about their potential impact on your credit profile.

Do Payday Loans Affect Your Credit?

In most scenarios, simply applying for or taking out a payday loan will not impact your credit score. This is because most payday lenders bypass the major credit bureaus (TransUnion, Equifax, and Experian) when assessing your application, relying instead on your income and banking history.

Since these lenders rarely report on-time payments, a payday loan generally does not help you build credit. However, it can significantly damage your credit if handled poorly.

Taking out a payday loan typically impacts your score only in the following specific situations:

• The lender reports to the credit bureaus. If you borrow from a lender that does report to the major bureaus, the loan will appear on your credit file. It will then factor into your amounts owed (credit utilization) and your credit mix, which account for 30% and 10% of your credit score, respectively.
• You fail to repay the loan. While on-time payments often go unreported, lenders are far more likely to report delinquencies. Late or missed payments can be reported to the bureaus, negatively impacting your payment history, which is the single most important factor in your credit score.
• The debt is sold to collections. If you default on the loan, the lender may sell the debt to a third-party collection agency. Collection agencies almost always report debts to the credit bureaus. A collection account on your report is a major derogatory mark that can severely damage your score.
• Legal action is taken against you. If a lender sues you for non-payment and wins, a civil judgment is filed. While civil judgments generally no longer appear on standard credit reports (as of 2017), the underlying collection account associated with the debt will remain on your report, continuing to suppress your score.

Can You Remove Payday Loans From Your Credit Report?

Generally, you cannot remove a legitimate payday loan or collection account from your credit report before the legal time limit expires. Accurate negative information typically remains on your report for 7 years from the date of the first missed payment.

However, there is an exception for errors. If a payday loan appears on your report inaccurately—for example, if the balance is wrong, the date is incorrect, or the debt isn’t yours—you have the right to file a dispute with the credit bureau. If the bureau confirms the error, they must remove or correct the entry.