A recent study by content consultants the Converted Click Uk has revealed valuable insights into loan statistics and debt statistics as well as tips on payday loans.

Loans are our quick savior whenever we get into a struggle or tight budget. And they say smartly using your loan can save you. But how do your payday loans affect your credit score? 

Your credit score

A credit score or also called a FICO score is a number that ranges between 0-850 that represents the consumer's creditworthiness. The higher a person got, the better chance for him to get approved with a loan. A credit score is a person's credit files, total debt, and payment history.

How is your credit score calculated?

Many people might get surprised knowing they don't have a fixed credit score. It may vary for some reasons: 

  • Company affecting the score computation.
  • The data where the score is based.
  • The method how they calculate your credit score.

The three different big credit bureaus may come up with various credit scores to pass on your lender. They are also different from FICO and VantageScore.

No one knows how they exactly did the computation. However, the following are serving as a guide to estimate credit scores:

  • The number of credit lines
  • The period of each credit line
  • The significance of each credit line
  • The balance of funds deducted from each credit line
  • The utilization rate of the maximum available credit
  • The records of on-time payments
  • The number of credit checks
  • The income of the user

Those factors have different weights in terms of computing credit scores. If the consumer pays the debt regularly before it is due and its utilization rate is under 30%, his credit score will increase. 

In contradiction, if his utilization rate is greater than 30%, his credit score potentially decreases. The same scenario will happen with a consumer with a larger balance on his credit line. 

The period of each credit line or the age is also affecting the consumer's credit score. The older it is, the more it supports your credit score. 

Loans that affects your credit score

There are a lot of loans in the market. But here are several financial instruments that can affect your credit score:

  • Payday loans
  • Bank loans
  • Credit cards
  • Student loans
  • Mortgages

Each is weighing differently. Mortgages and student loans are less-weighted, while credit cards play the standard weight for a kind of loan.

Commonly, a consumer requests a credit line, and the lender will ask someone from credit bureaus to check his credit score. That's how credit scores work in general.

The people in the credit bureaus will compute the consumer's score based on the guidelines listed above, then it will submit it back to the lender. In the next step, the lender will decide if the consumer is creditworthy enough for the loan. 

The word ''creditworthy enough'' is the term to remember. The lender expects some people to default and incapable of repayment. Wherein lenders are considering losing the money when consumers default. Their primary step is to calibrate the interest rate relative to the percent chance of the consumer's borrowing default.

The higher the chance of defaulting, the lender will charge the consumer a higher rate of interest. Or they will give them an option to use short-term loans to avoid the scenario.

One thing to avoid at all costs is taking out loans with extremely high interest rates or unrealistic payment plans. This situation can cripple your finances very quickly. It is best to get sound financial advice if you are currently in a payday loan situation or loan which is stretching you too thin.

On the other hand, people with high creditworthiness can get loans with low-interest rates, long-term payment periods, and other consumer benefits. 

Reality check, if the consumer less needs it, the more generous the terms are. The more the consumer is desperate to get it, the heavier the agreement will be. It is either they will accept it or look for a new lender. 

Does my payday loan will impact my credit score?

A payday loan will not appear on your credit report if you pay it before regularly. Most of the lenders submit your loan to niche reporting agencies like Factor Trust and Clarity.

Your payday loan will affect your credit score if you do not pay for it. The best thing that you can do is to repay your loan on-time, making you worry-free.

How to fix my credit score after the damage?

When your credit score gets damaged with the defaults and reports have been submitted to agencies, here are few steps that you can do to make changes to your credit score.

Step 1 Collection agency

Make sure that your collection agency is working within the limits of what is legally mandated. You have protection from payday lenders and collections agencies. Know your rights as collection agencies with lenders use dishonest tactics to blow out the law.

Step 2 Lessen taking out payday loans.

As much as possible, avoid taking out payday loans. Yes, your payday loan does not affect your credit score. But the credit agency will discover that you are about to maximize the credit lines by adding all of your loans.

Step 3 Remain current.

Once you get out from taking out a payday loan, the best practice you can do is remain current from debts. It helps your loans from defaulting, which eventually will harm your credit score. 

Summary

Loans can be your guardian angels to save you. However, they can also be your nightmare, dragging you to a more complicated situation. The best thing you can do is be responsible enough to take additional obligations, or you can talk to someone before deciding. 

Author's Bio: 

My name is James K Meyer. I have been an entrepreneur and passionate blogger for over a decade, during which time I have written thousands of articles on my blog and many other publications. I write about Business, Health, Technology, Automobiles, Legal, Hospitality and much more. I am also an active contributer on Entrepreneur, Forbes, NYTimes