While driving in Tucson last week, I passed a cash advance/pay day loan store with a big sign out front that said “FIRST LOAN FREE”.  My initial thought was that they know most people will be coming back for the second, third and fourth loans, so they’ll make their money through repeat business.  My next thought was once they’ve got you, they’ve got you through life and debt.

There is obviously a need for these businesses, based on our system of supply and demand; just look at how many are in your town or neighborhood.  And they do serve a purpose in some circumstances.  Critics protest the extremely high interest rates and the predatory nature of some of these companies.  The debate will continue and everyone has an opinion.

However, we’re here to talk about credit.  What do pay day loans have to do with getting better credit scores?  Well, we review thousands of consumer credit reports and see many different types of accounts on those reports.  And we’ve seen cash advance loans have a negative impact on credit scores.  Not directly, but through collection accounts. 

Remember, companies have to pay the credit bureaus to report your information on your credit report.  And pay day loan companies don’t do that.  However, when a consumer does not pay back the cash advance, it usually gets sold to a collection agency.  And many collection agencies DO report to at least one of the credit bureaus, if not all three.

If one collection agency isn’t successful in getting paid for the account, they sell it to another agency.  This can happen several times over a period of years, having a detrimental impact on credit scores.  We’ve seen credit reports with multiple collection accounts for five or six different cash advance companies.  It can be devastating to a person’s credit rating and their confidence for their financial future.

If you are considering a cash advance, know the facts.  Educate yourself on these types of businesses. PayDay Loan Consumer Information and the FTC both have good information and reference material for consumers.  

Check your credit reports.  If there are collection accounts listed with an outstanding balance on items you have already paid, dispute it with the credit bureaus and request that it be corrected.  You may need to send a copy of the receipt showing you paid the loan off.  Always get something in writing when you pay a bill.  A cancelled check, statement showing zero balance or a register receipt can all be helpful when trying to correct your credit reports. 

Most people don’t realize that their financial actions NOW have a tremendous impact on their financial future.  Learn about your credit, be proactive with your personal finances and carefully consider all debt obligations before you sign on the bottom line.