Do Payday Loans Help Your Credit?

Short answer — payday loans usually do not help your credit. Most U.S. payday lenders do not report on-time payments to Equifax, Experian or TransUnion, so paying one off on time will not build your score. But if you miss payments and the loan goes to collections, your score can drop by as much as 100 points, and the collection account can stay on your credit report for up to seven years, according to the Consumer Financial Protection Bureau (CFPB) and myFICO.

Key Takeaways

• Payday loans usually won't build your credit because most U.S. lenders don't report on-time payments to Equifax, Experian or TransUnion. Paying one off responsibly will not raise your score.

• Missed payments can seriously damage your credit if the debt goes to collections, dropping your FICO score by up to 100 points and staying on your report for up to seven years.

• If you want to build credit, skip payday loans and try a secured credit card or a credit-builder loan since both report to the bureaus and carry far lower annual percentage rates (APRs).

Summary generated by AI, verified by MoneyLion editors

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What Is a Payday Loan?

A payday loan is a short-term, high-cost loan you borrow against your next paycheck. Loan amounts in the U.S. are usually $500 or less, and lenders charge a flat fee of about $10 to $30 for every $100 borrowed, according to the CFPB. That fee structure pushes the annual percentage rate (APR) on a typical two-week payday loan to around 400% or more.

You are expected to repay the full balance — plus fees — on your next payday, often in two to four weeks. Because the loan is built around fast access to cash rather than long-term credit building, it works very differently from a credit card or a personal loan.

Here’s how payday loans work:

• You borrow a small amount (typically $100 to $1,000).

• The lender gives you cash up front and expects full repayment, including fees, in about two weeks.

• If you can’t repay on time, you roll over the loan, leading to deeper debt.

How Do Payday Loans Affect Your Credit?

Can payday loans go on your credit report or mess with your credit score? Let’s dive in deeper.

Payday Lenders Do Not Report to Major Credit Bureaus

Most payday lenders in the U.S. do not report your loan or your payments to Equifax, Experian or TransUnion, according to the CFPB. Some lenders in other countries do report payday loan activity, but that is not standard practice in the U.S. market. That means your responsible payments won’t help build credit, but they can still affect your finances in other ways. 

If you fail to repay a payday loan, the lender may send your debt to a collection agency, which can report the delinquency to the credit bureaus. This could damage your credit score and make it harder to qualify for traditional loans in the future.

Some Lenders Conduct a Credit Check During the Application Process

While payday lenders don’t report payments, some do a hard credit check when you apply. Too many hard inquiries in a short time can knock 5 to 10 points off your score.

👉 Do Payday Loans Check Your Credit?

Payday Loan Debt in Collections Can Hurt Your Credit

Do payday loans hurt your credit? They certainly can. If you miss payments, lenders might sell your debt to a collection agency, which reports to credit bureaus. A payday loan in collections can stay on your credit report for up to seven years, per the Fair Credit Reporting Act enforced by the Federal Trade Commission (FTC). And a new collection account can lower your FICO score by as much as 100 points, depending on where your score started, according to myFICO.

How to Manage Your Payday Loans To Protect Your Credit

Want to borrow smart and avoid getting in over your head? Keep these tips in mind:

• Only borrow what you need: Avoid overborrowing and getting trapped in a debt cycle.

• Create a repayment plan: Budget for your loan so you don’t scramble at the last minute.

• Set reminders for payments: Missing a due date can trigger sky-high fees.

• Communicate with your lender: If you can’t pay, ask for an extended repayment plan instead of rolling over the loan.

• Monitor your credit report: Check your credit regularly to catch errors and collections accounts.

👉 Pros and Cons of Payday Loans

Alternatives That Actually Help Your Credit

If your goal is to build credit instead of cover a one-time cash gap, these three options report to the major credit bureaus and can move your score in the right direction.

Secured Credit Cards

A secured credit card requires a refundable cash deposit that becomes your credit limit. It works like a regular credit card, and the issuer reports your payment activity to the three credit bureaus each month, which can help build your credit score with consistent, responsible use.

MoneyLion can help you explore a wide variety of credit card options tailored to different needs and preferences.

Credit-Builder Loans

A credit-builder loan holds the loan amount in a locked savings account while you make fixed monthly payments. The lender reports those payments to Equifax, Experian and TransUnion, and you get the cash once the loan is paid off.

MoneyLion offers a free and convenient way to find offers from our trusted partners to help you improve your credit — such as credit monitoring, credit report disputes, and getting credit by paying bills. A good credit score can lead to lower interest rates and increased borrowing power on loans and credit cards.

Becoming an Authorized User

When a family member or trusted friend adds you as an authorized user on their credit card, the account history may appear on your credit report. If the primary cardholder pays on time and keeps a low balance, that positive history can help your score.

Payday Loans vs. Credit-Builder Loans vs. Secured Credit Cards

Here is how payday loans stack up against two products designed to help you build credit.

Frequently Asked Questions

Do payday loans show up on your credit report?

Most U.S. payday lenders do not report to Equifax, Experian or TransUnion, so the loan itself usually will not appear on your credit report. The exception is if you fail to repay and the debt is sent to a collections agency, which will report it.

How long does an unpaid payday loan stay on your credit report?

A payday loan in collections can stay on your credit report for up to seven years from the date of the original missed payment, according to the Fair Credit Reporting Act. That is the same window that applies to most other negative items.

Can you use a payday loan to build credit?

No. Because on-time payments are not reported to the credit bureaus by most U.S. payday lenders, repaying one will not build your credit history or raise your score.

What happens if you do not pay back a payday loan?

The lender can charge additional fees, attempt repeated bank withdrawals and eventually send the debt to collections. Once it hits collections, it can be reported to the credit bureaus, drag down your score and lead to calls, letters or even a lawsuit.

Are payday loans reported to the credit bureaus anywhere?

In the U.S., most payday lenders do not report to the three main credit bureaus. Some lenders in other countries — and a small number of U.S. lenders — do report payment activity, but that is not the norm.

Key Terms

• Payday loan: A short-term, high-cost loan, usually for $500 or less, that’s typically due on your next payday.

• Annual percentage rate (APR): The yearly cost of borrowing, including interest and certain fees, shown as a %.

• Credit bureau: A company that collects and sells information about your credit history, payment behavior and debts.

• Collection account: A debt account reported after a lender sends or sells unpaid debt to a debt collector or collection agency.

• Credit-builder loan: A loan designed to help build credit by reporting your fixed monthly payments to the major credit bureaus.

Sources:

• Consumer Financial Protection Bureau: What is a payday loan?

• Federal Reserve: Glossary

• Consumer Financial Protection Bureau: What is a credit reporting company?

• Consumer Financial Protection Bureau: How long does information stay on my credit report?

• Consumer Financial Protection Bureau: What is a credit-builder loan?

Summary generated by AI, verified by MoneyLion editors

Jacinta Majauskas contributed to the editing of this article.