Do Payday Loans Help Build Your Credit?

If you’re trying to build your credit score, taking out a payday loan isn’t the answer. While most types of loans can help you build credit, these short-term loans work differently from traditional options.

In most cases, you won’t see any positive impacts on your credit because these lenders don’t report on-time payments to the major credit bureaus. But there can be a negative connection between payday loans and credit scores if you fail to repay what you borrow.

Do payday loans build credit?

No. Most short-term lenders don’t report your payment history to the three major credit bureaus: Experian, Equifax, and TransUnion. Traditional installment loans and credit cards typically report your monthly payments.

Making on-time payments is one of the most important things you can do to build your credit score over time. Since payday lenders skip that process, paying back your loan on schedule won’t typically improve your credit.

Read more >> Pros and cons of payday loans

Why payday loans don’t show up on your credit report

Payday lenders do monitor and report payments, just not to the credit bureaus that matter to your score. Rather, the industry uses alternative consumer reporting agencies owned by Experian, Equifax, and TransUnion but kept apart from traditional credit files — companies like Clarity Services, DataX, and FactorTrust.

Payday lenders check these reports, as well as your pay stubs and bank accounts, when deciding whether to lend you money. Because FICO and VantageScore don’t read these specialty credit files, on-time payments typically don’t reach your score.

Payday lenders often report negative activity or send your account to collections if you don’t repay what you owe, however. The collection agency can then report that debt to the credit bureaus.

How payday loans can hurt your credit

Payday loans and credit scores are connected, but only if you don’t fulfill your obligations. There are also some indirect consequences of relying on payday loans. Here’s how these lending products can worsen your financial health:

Collections from unpaid payday loans

Payday lenders typically forward unpaid loans to collection agencies. If your loan is sent to a collection agency, that agency can report your delinquent account to the major credit bureaus.

Once a collection account appears on your credit report, your score is likely to drop. If you have collection accounts on your report, it will be harder to qualify for a mortgage, auto loan, apartment, or new credit card.

Don’t ignore the payday loan. If you fall behind, reach out and ask to set up a payment arrangement. Collection agencies may be willing to negotiate, but understand what you’re getting: paying or settling doesn’t remove the collection from your report. Settling for less than the full balance due can affect your credit.

Sitting on a collection account or charge-off? Kikoff’s debt negotiation tool contacts the collector for you and brings back an offer. You decide whether to take it.

The debt cycle and missed payments elsewhere

Many borrowers take out payday loans because they are already struggling to pay their bills. Unfortunately, these loans feature high fees and short repayment windows, which can make those challenges even worse.

A typical two-week payday loan at $15 per $100 borrowed works out to an APR of nearly 400%. Compare that to roughly 12% to 30% on credit cards.

And some people need another payday loan just to repay the first one. Others spend so much money on loan fees that they fall further behind. If you miss rent, credit card, or other bill payments, your score can drop. This indirect connection between payday loans and credit scores is something that many borrowers overlook.

Read more >> How to manage payday loan debt

Alternatives to payday loans that actually build credit

Payday loans won’t help to build your credit, but there are several other options that can add positive payment history to your credit report.

Credit builder loans

A credit builder loan can help you establish a positive payment history while building up your savings. The lender places the money you borrow into a secured account. You make monthly payments, and each on-time payment is reported to the credit bureaus. After you finish repaying the loan, you receive the money, minus any applicable fees or interest.

Secured credit cards

A secured credit card requires a refundable security deposit. The card issuer will usually set a credit limit that equals your deposit. You use the card like any other credit card and make monthly payments on your balance. The card issuer will report on-time payment history to one or more of the major credit bureaus. Keeping your balance low and paying your bill on time can help improve your credit over time.

Credit accounts with reported payment history

Credit builder accounts, most personal loans, and some rent reporting services provide you with opportunities to establish a positive payment history. Kikoff offers several credit-building tools, including the free Kikoff Credit Account that reports your on-time payments to all three credit bureaus, no credit check required.

Read more >> 8 payday loan alternatives

Build credit so you have better options next time

Payday loans are expensive because they're a last option when you need money fast. Over time, building a stronger credit profile opens up cheaper alternatives, so the next emergency has more than one answer.

Kikoff reports your on-time payments to all three credit bureaus, with no credit check to sign up.