Archive for the ‘payday loan boost’ Category

postheadericon Can a payday loan boost your credit score?

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Anyone with a poor credit score needs to build it up if they want to apply for a mortgage or other loan in the future. Some are choosing to take payday loans on the basis that they will pay it back quickly and thus help them appear a slightly better prospect. But is this wise, and will it actually work?

Be wary of payday loans
Payday loans (or direct lenders) are extremely risky, whatever your motivation for taking one out. The interest rate is incredibly high, something that may be overlooked given that the loan is intended to be very short-term. For example, borrowing £200 for 28 days can cost around £45. The borrower thinks that £45 isn’t very much, but ignores that for such a short period the interest rate is a frightening 1,200%. In addition, if they are unable to repay the loan on time, not only will this not help their credit score, but they could end up owing a lot more than the original loan. This kind of short-term, high-cost credit is intended to tide you over a short-term cash flow problem, but if you are that short of cash the risk of taking on a debt you can’t repay is simply not worth taking.

There are better ways to boost your credit score
People resort to payday loans because they aren’t able to access other forms of lending with more reasonable rates of interest. Typical users have been rejected for credit cards, or have defaulted on loans in the past. This makes them unappealing to lenders. However, there are still better ways for them to work on increasing their credit score. Even a high-interest credit card will be better than a payday loan. It also takes time to build up your credit score, so taking a payday loan is not a quick fix to a poor rating.

Payday loans can damage your credit score
Some payday lenders (or direct lenders)will claim that taking one (or more) of their loans, and repaying it on time, will help your credit score. Be wary of such claims, especially from someone who has a vested interest in persuading you to take these loans. Not only is this an expensive way of taking credit, but it could actually work against your attempts to boost your credit score. Many lenders will be suspicious of anyone who uses this risky form of credit. They are likely to assume that if you have resorted to payday loans, you have serious financial issues and are not a good prospect for any loan, let alone a mortgage. Indeed, many mortgage lenders will refuse any applicants who have taken a payday loan, so you could actually be sabotaging your own attempts to increase your credit rating.