How Long Does a Payday Loan Stay in the System?
Uncover the various ways payday loans are recorded and how long they persist in different financial systems, affecting your credit and future.
A payday loan is typically a short-term, high-cost loan, generally for $500 or less, that borrowers repay by their next payday. These loans are often sought to cover immediate financial needs until income is received. How long a payday loan remains “in the system” depends on whether it was paid as agreed or defaulted, and which financial system is considered, including major credit bureaus, specialized lending databases, and the lender’s internal records.
Presence on Credit Reports
Payday loans generally do not appear on major credit reports from Equifax, Experian, or TransUnion if repaid on time. Most payday lenders do not report positive payment history to these national credit bureaus. This means a responsibly managed payday loan typically will not help build a positive credit history or improve a credit score.
A payday loan can significantly impact a credit report if it goes into default or is sent to collections. If a borrower misses payments, the lender may report the delinquent debt to the major credit bureaus. Such negative marks can remain on a credit report for up to seven years from the date of the original delinquency. This prolonged presence can severely lower a credit score, making it difficult to secure other forms of financing.
The impact on a credit score can be substantial, with a single collection account potentially causing a drop of 50 points or more. Hard inquiries, which occur when applying for a loan, can also temporarily affect a credit score and typically remain on a report for about two years. Consumers can monitor their credit reports for these entries by obtaining free copies from each of the three major credit bureaus through annualcreditreport.com.
Presence in Specialized Databases
Beyond the major credit bureaus, a payday loan’s presence extends to specialized consumer reporting agencies, which payday lenders frequently utilize. Companies such as CoreLogic Teletrack and Clarity Services maintain databases specifically for assessing a borrower’s history with short-term loans. These databases track loan applications and repayment behaviors.
Records in these specialized databases can persist for several years, often up to six years, even for paid loans. Payday lenders consult these databases to evaluate risk for future short-term loan applications. A history of payday loan usage, even if paid, can influence eligibility for subsequent loans from different lenders.
An individual lender’s internal database will retain a record of a borrower’s loan history indefinitely. This internal record can impact future borrowing from that specific lender. ChexSystems, another specialized reporting agency, tracks checking account activities and can reflect issues if a payday loan leads to overdrafts or account closures. Negative information on a ChexSystems report, such as account misuse or excessive overdraft, typically remains for up to five years, potentially affecting the ability to open new bank accounts.
Minimizing Negative Impact
Managing the effects of a payday loan, especially one that has negatively impacted financial records, involves several actionable steps. Paying off a payday loan, even if it has gone into default or collections, is an important first step. While paying off a collection account will not immediately remove it from a credit report, it will update the status to “paid.” Newer credit scoring models like FICO 9 and VantageScore 3.0 may disregard paid collections entirely, potentially aiding in score improvement.
Disputing any inaccuracies found on credit reports is another action. Consumers have the right to dispute incorrect or outdated information with each of the major credit bureaus and the business that reported the information. This process typically involves submitting a written dispute with supporting documentation. If the information appears on specialized databases, consumers may also be able to dispute inaccuracies by contacting those agencies directly.
Building a positive credit history is essential to gradually outweigh the negative impact of past payday loan issues. This involves consistently making all payments on time for all financial obligations. Using secured credit cards or small installment loans responsibly can help establish a track record of positive payment behavior. Over time, demonstrating financial responsibility can improve a credit score, opening access to a broader range of financial products.