Do Payday Loans Affect Your Credit Score? When They Help, Hurt or Don't Show

Payday loans usually don't affect your credit score as long as you repay on time, because most payday lenders don't report to the three major credit bureaus. That cuts both ways: repaying one won't build your credit. But if you default and the debt goes to collections, it can appear on your credit reports and lower your scores for years.

That asymmetry is the key point. A payday loan offers little credit upside and real downside if things go wrong. Below is how payday loan reporting actually works, what shows up where and how to protect your credit if you already have one.

How payday loans are reported to credit bureaus

Your credit scores are calculated from the reports kept by the three nationwide credit bureaus: Equifax, Experian and TransUnion. Lenders choose whether to report accounts to them. Credit card issuers, auto lenders and mortgage lenders generally report every month. Most payday lenders do not.

Reporting practices vary by lender, especially among online lenders and those offering longer-term installment products, so read the loan agreement or ask whether the lender reports to any bureau. If a lender does report, late payments will count against you just as they would on a credit card, so the reporting question matters in both directions.

It is also worth separating your credit reports from your credit scores. Reports are the underlying records; scores are calculated from them. A payday loan that never appears on a report cannot move a score built from that report, which is why most payday borrowing is invisible to traditional scoring until a collector steps in.

Specialty consumer reports and payday lenders

Even though payday lenders rarely use the big three bureaus, they do check your history. Many rely on specialty consumer reporting agencies that track short-term loans, bank account behavior and previous applications. These reports can include:

• Past payday and short-term loan applications and approvals
• Loans that went unpaid
• Bank account closures for overdrafts or unpaid fees

These specialty reports usually don't affect your FICO or VantageScore scores, but they can affect whether you are approved for future short-term loans or even a new bank account.

How unpaid payday loans can hurt your credit

The main way a payday loan damages your credit is through collections. If you stop paying, the lender may sell or assign the debt to a collection agency. Many collectors report accounts to the major credit bureaus, and a collection account can:

• Lower your credit scores, sometimes substantially, especially if your credit history is otherwise thin
• Stay on your credit reports for up to seven years from the original delinquency date
• Make it harder or more expensive to get approved for credit cards, car loans, apartments or mortgages

There are indirect effects too. Failed automatic withdrawals can trigger overdraft and returned-payment fees, and if those go unpaid, your bank could close the account and report it to a specialty agency. And if you fall behind on other bills while juggling a payday loan, those accounts can show late payments. For a full walkthrough of what follows a missed payment, see what happens if you don't pay a payday loan.

Can payday loans help you build credit?

Almost never. Because on-time payments usually aren't reported, you pay a high price for a loan that does nothing for your credit profile. If building credit is one of your goals, consider products designed for that purpose and that report to all three major bureaus:

• Credit-builder loans from credit unions and community banks
• Secured credit cards with a refundable deposit
• Payday alternative loans (PALs) from federal credit unions, many of which report payments. Learn how they work in our guide to payday alternative loans.
• Becoming an authorized user on a trusted family member's well-managed credit card

For more ways to cover a short-term gap, see our roundup of payday loan alternatives.

Payday loans and future loan applications

Even when a payday loan never touches your credit report, it may come up elsewhere. Mortgage lenders, for example, review recent bank statements. Frequent payday loan deposits and withdrawals can prompt questions about your cash flow and budget. If you are planning to buy a home, it may be worth avoiding payday borrowing in the months before you apply; our guide to mortgage preapproval explains what underwriters review.

How to protect your credit if you have a payday loan now

If you already have a payday loan, a few steps can keep it from turning into a credit problem:

1. Contact the lender early if you can't repay in full, and ask about an extended payment plan, which some states require.
2. Avoid rolling over repeatedly; see our guide to getting out of payday loan debt.
3. Get any settlement in writing, including how the account will be reported, before you pay.
4. Check your credit reports regularly for collection accounts and dispute any errors with the bureau and the collector.
5. Keep other bills current, especially those that do report, like credit cards and auto loans.

The bottom line

Payday loans usually don't affect your credit while you repay them, but they don't help build it either. The real risk comes if the loan goes unpaid and ends up in collections, which can hurt your scores for years. If you need both short-term cash and a stronger credit profile, a credit union alternative that reports to the bureaus is usually the better choice.