Payday Loans and Credit Score: The Relationship Demystified

A brief introduction to the concept of ‘Credit Score’

Most forms of credit available today, with the exception of payday loans, are dependent on the credit rating of an individual. A credit score or a credit rating is essentially a statistical representation of the likelihood of an individual paying back the money that he/she owes. It is based on a number of factors e.g. your credit repayment history, your current debt situation, how often you apply for credit etc. This score generally ranges from 350 (considered to be very high risk category) to 850 (very low risk category). Equifax, Experian and Trans Union are three of the most recognized credit bureaus that award these credit ratings.

Why is credit score so important?

As mentioned in the beginning, barring payday loans, all other types of credit are subject to a ‘favorable’ credit score. So, your credit card application, application for a personal loan and the interest rate on your personal loan, acceptance of your checks by your bank, and even things as basic as a new phone connection are all dependent on the credit score that you have. In short, the importance of credit score cannot be overemphasized.

How does credit score get damaged?

Overdraft on bank accounts, bounced checks, credit card late fees, defaulting on personal loans and mortgages, non-payment/late payment of your utility bills etc are some of the common events that could set off a downward spiraling of your credit ratings. One thing that can help you to protect/ repair your credit score is an intelligent use of payday loans.

Some ways to build your credit ratings

• Keep your outstanding debt to the minimum
• Pay all your bills and utility bills like electricity, water, telephone etc. on time.
• Avoid late repayments on credit cards; credit cards are quite tempting to use but can be quite expensive and damaging in the long run.
• Don’t send out too many applications for credit as each time a potential lender views your application it is reflected on your credit report.
• If you need some credit for urgent requirements, it’s better to go for payday loans rather than relying on credit cards or other such sources which could end up damaging your credit score. Since payday loans are meant to be repaid on your next payday, if you plan and spend responsibly, the chances of defaulting on payday loans are relatively low.

The role played by Payday Loans

Payday loans are the short term cash advances that are meant to be repaid with your subsequent paycheck. As they are of a short duration and are issued in small quantities of up to $1500, so payday lenders, unlike any other lenders, generally do not check your credit score. So in those desperate times when your credit score is bad, you know that you still have a chance to secure credit in the form of payday loans. Thus using payday loans in such times has the double benefit of not just providing a cheap source of fast and easy credit, but also to free you of the constraints imposed by your credit score.