Payday loans puts credit score at unfair risk
He examined how some assert that paying short-term loans can build a positive credit history, while others assert that it could stop customers securing a mortgage.
Although borrowing money and paying it back in full and on time normally improves your credit history, with payday or short-term loans this can be seen as a sign of financial hardship or mismanagement.
Two thirds of mortgage brokers said they had a customer turned down after taking a payday loan, a recent online snapshot poll revealed.
Hamblin-Boone said: “Unfortunately, when it comes to short-term loans, it seems that some finance companies and mortgage brokers are judging customers on the type of loan they have taken rather than their ability to repay.
“None of us can predict the future, so it seems unfair to black mark a person’s credit score based on a period when money was tight and they were managing with short-term loans.
“It’s a tough time economically for most people and anyone could find themselves needing a little extra cash at the end of the month. So why make matters worse by penalizing them for taking measures to help themselves, especially if they pay back their loan on the agreed date?”
Sometimes people can suffer a temporary blip, as over the course of four years more than half of working age people find themselves living on a low to middle income for at least one year, think tank Resolution Foundation discovered.
James Jones at Experian, said: “Each lender will assess your credit history using its own criteria and while some may see a successfully settled and well-managed payday loan as positive, others may disagree.
“Importantly, each lender’s own creditworthiness assessments will be based on how its past customers who had used short-term credit when they made their applications then went on to behave – that’s how credit scoring works.
“It’s possible that a fair chunk of the mortgage refusals cited by brokers were based on affordability calculations and that for these customers their payday loan use was merely a symptom of underlying financial issues.”
Halifax takes a more sympathetic view to payday loans, treating them like any other form of credit when assessing a mortgage application.
Indeed, two of the major credit reference agencies say that if you can repay a payday loan on time and in full then any effect on your credit rating could well be positive.
Peter Mansfield, managing director of Callcredit, said: “If used responsibly payday loans may well help to improve the credit profile of many consumers, especially those with either little credit history or those with a previous history of missed payments and arrears.
“Late and missed payments and large volumes of loans would have a negative impact on a consumer’s credit profile. However, it is difficult to generalise as the overall interpretation of the details contained on a consumer’s credit file is down to each individual lender.”
Hamblin-Boone said credit scoring works on behavioural basis by making predictions based on how a consumer has acted in the past.
He added: “Taking out a payday loan in itself will not affect your credit score. However, failing to pay it back will.
“That is fair and reasonable. What isn’t fair is to judge people on the type of credit they have used rather than their track record in repaying that money. “
“We should see short-term credit as a golden opportunity to help people get on track with their finances.”