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Will using payday loans affect my credit rating

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There may be times when a PayDay loan is a necessary last resort to get you out of a financial fix. Will using payday loans affect my credit rating and affect the way traditional lenders will view my creditworthiness in the future?

BBC Newsnight recently conducted a spot of research that suggested mortgage lenders may be more likely to refuse applicants who have previously availed themselves of a PayDay loan. Naturally, the

PayDay loan companies responded swiftly, asserting that careful use of their services can actually enhance your credit score, and not necessarily damage it. So who’s right?

How do Mortgage Lenders Assess You?

Every mortgage lender has its own criteria for assessing applications, but there is a broad framework within which they all operate. Areas they may consider include:

Outstanding loans – any existing loans that you have with more than around three months to run will usually be flagged for consideration by lenders. This is because in assessing your application their primary concern is your ability to meet their repayment schedule. Lenders need to be sure you are not over-stretching yourself financially. Given that PayDay loans tend to be short-term – 31 days is the norm – your PayDay loans may remain below the mortgage lender radar, provided of course that you settle these debts in a timely fashion

Credit Card debt – it’s tempting to just pay the minimum monthly interest off on your credit cards, but this can signal to mortgage lenders that you have little flexibility in your finances. This can cause a problem if interest rates rise and you are not on a fixed rate loan. If you are able to increase the amount of your monthly repayments to credit card lenders to a level above the minimum limit this is generally viewed favourably by mortgage lenders

Outstanding Bills – keeping up to date with your regular bills is important too, as lenders like to see a regular payment pattern. It shows you take your financial responsibilities seriously

Other Credit Applications – numerous requests for credit, whether approved or not, can make mortgage lenders nervous. If you are applying for a PayDay loan every month for example, even if you are paying it off when required, it can suggest to lenders that you are consistently lacking the financial means to meet your commitments

So Will the PayDay Loan thing Wreck my Chances or Not?

Will using payday loans affect my credit ratingIn truth it’s hard to say. On its own, it shouldn’t. But perception is a curious thing, and PayDay loans have received a lot of bad press. And one PayDay loan repaid promptly a year ago is a very different scenario from a regular series of monthly loans that suggest a pattern of financial shortfall. Whenever you take a PayDay loan you have to consider that it may affect the way a future mortgage application may be viewed, but put faith in the review scoring process and trust that it will be fair. There really is nothing more you can do.

Lenders will view the issue of PayDay loans as just one factor of your application. Provided the rest of your overall credit history is solid they are unlikely to refuse you solely on that basis. And if you are declined by one lender, it’s always worth trying with a different one.

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About Cally Worden

About Cally Worden

Seasoned freelance writer Cally Worden lives with her family and dog in a quiet corner of rural France. A love of the outdoors, and a fascination with her children's ability to view life with fresh eyes provide the inspiration for much of her work. Cally writes regularly for various websites and UK print publications on subjects as diverse as parenting, travel, lifestyle, and business, and anything that makes her smile.

Website: Cally Worden

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