Payday loans are often seen as a quick fix when you’re short on cash, but how do they affect your credit score?
While they’re easy to access and don’t usually require a credit check, payday loans still come with their own set of risks.
If you’re considering a payday loan but worried about your credit score, you’ll want to know all about how payday loans can impact your credit, when they show up on your credit report, and what you need to watch out for before making a decision.
Key Points You Should Know
- Payday loans don’t build credit, but they can hurt it if not repaid.
- If you default on your payday loan, your debt may be sold to a collection agency. Moreover, you may be charged penalties for any late or missed payments.
- If you need cash quickly, a few other options exist that may offer more flexibility and affordability.
Do Payday Loans Affect Your Credit Score?
Generally, payday lenders in Canada do not require any credit checks, so your credit won’t be affected when you apply. Similarly, payday lenders do not report your loan or repayment history to the credit bureaus, so taking out a payday loan generally won’t impact your credit positively or negatively, if repaid.
However, if you miss payments and the debt gets sent to a collection agency, that could show up on your credit report and damage your credit score. So while payday loans won’t help your credit, they can still damage it if things don’t go to plan.
Learn more: Payday Loans
When Can Payday Loans Affect Your Credit?
While payday loans don’t typically help your credit score, there are a few situations where they can have a negative impact.
Credit Checks
Most payday lenders don’t run a credit check when you apply for a loan. More commonly, lenders will do a soft credit check, which allows them to verify some basic financial info without affecting your credit score at all.
That said, even if your lender requires a hard credit check, it generally has a small temporary negative impact.
If The Loan Goes To Collections
This is where real damage can happen. If you fail to repay your payday loan, the lender may eventually send the unpaid debt to a collection agency.
Unlike payday lenders, collection agencies do report to credit bureaus, and having an account in collections can seriously harm your credit. A collection record will result in an R9 rating, which is the same rating as a bankruptcy, which can remain on your credit report for up to six years, even after it’s paid off.
Indirect Credit Impact
Importantly, even if the loan itself isn’t reported, payday loans can still lead to a dangerous snowball effect on your finances.
For example, if a lender tries to withdraw repayment from your account and the funds aren’t there, you could get hit with NSF fees.
When you’re already stretched, those extra fees can push your budget over the edge, making it harder to pay other important bills, like your credit card or utility bills, which are reported to credit bureaus.
In that way, payday loans can indirectly damage your credit by setting off a chain reaction of missed payments and causing further financial stress.
Learn more: Payday Loans: Know Your Rights
Can Payday Loans Positively Affect Your Credit?
In almost all cases, no, payday loans won’t help your credit score.
Unlike traditional forms of credit, such as credit cards or installment loans, payday lenders don’t report to any credit bureaus. That means your loan, repayment history and even successful payoff won’t show up on your credit report.
So, while using a payday loan responsibly might help you avoid financial trouble in the short term, it won’t help contribute to a stronger credit profile.
That said, if your goal is to build credit, you’d be much better off with a secured credit card or a credit-builder loan, both of which are specifically designed to report your activity and improve your credit score over time.
Do Payday Loan Payments Help Build Credit?
As mentioned, payday loans don’t help build credit.
Even if you make your payments on time, or pay off the full balance early, those positive actions aren’t reported to credit bureaus like Equifax or TransUnion. Without that reporting, your credit score won’t benefit in any way.
It’s a common misconception that any kind of loan helps build credit, but that only applies when lenders share your repayment history with credit bureaus. Payday lenders typically operate outside the traditional credit system, so even perfect repayment habits will go unrecognized.
If I Pay Off My Payday Loan, Will It Help My Credit?
Unfortunately not. As explained above, paying off a payday loan won’t improve your credit score. While doing so is still important in order to avoid fees and collection activity, it has no positive impact on your score.
If you’re looking for ways to grow your score, consider using products that are actually designed to report your payments, like a secured loan or secured credit card.
Alternatives To Payday Loans
If you’re considering a payday loan but feel anxious about protecting your credit, there are better options out there.
These alternatives not only provide short-term financial relief, but some will also help strengthen your credit profile over time.
Secured Credit Cards
A secured credit card requires a refundable deposit, which is typically then matched to your credit limit. That way, you can’t get into more debt than you can afford.
These cards function like regular credit cards, and your activity is reported to major credit bureaus. They are designed specifically to help keep payments low so that you can pay on time and build your credit score over time. This makes them one of the most accessible and effective tools for building credit.
Learn more: The Top Secured Credit Cards In Canada 2025
Credit-Builder Loans
Offered by some credit unions and online lenders, a credit-builder loan holds the borrowed funds in a secured account while you make monthly payments.
Once the loan is fully repaid, the money is then released to you. This helps you build a positive payment history, which is the single biggest factor when it comes to determining your credit score.
Personal Lines of Credit
If you have fair credit or a co-signer, a line of credit from a bank or credit union might be a useful option. Interest rates will usually be much lower compared to payday loans, and payments should be more manageable.
And crucially, these products usually report to credit bureaus, so it will help build your credit over time.
Local Community Assistance or Employer Advances
Before turning to high-cost payday loans, consider exploring potential financial assistance programs in your community, or even talk to your employer about the possibility of a paycheck advance. These options may come with no interest and should have no negative impact on your credit.
Bottom Line
A payday loan isn’t going to help your credit score, but they can definitely hurt it if things go off track.
Since most lenders don’t report your payments, there’s no upside in terms of credit building. But if you default and the loan ends up in collections, that is likely to seriously damage your score, and remain on your credit report for years.
If you’re looking to build credit, safer alternatives like secured credit cards or credit-builder loans are a much better place to start.
