While taking out payday lending requires no credit check, the use of short term loans can ruin your credit rating – even if you repay the loans on time!

In a true case of ‘damned if you do, damned if you don’t,’ it turns out that taking out payday lending to manage an unexpected emergency, even if you can easily afford to repay the loan, can end up having a deleterious effect on your credit. Meanwhile, major payday lenders such as Wonga have been encouraging people to take out their no credit check payday loans as a way of rebuilding damaged credit, even though this is most assuredly not the case.

Between a rock and a hard place

Thanks to the sluggish economic recovery from the credit crisis and resultant worldwide recession, many a Brit has had to run up moderate to high levels of consumer debt in order to make ends meet. It’s unfortunate, but the fact of the matter is that with wage freezes or job losses UK households have less cash available to them on a monthly basis, which can be crippling when an unexpected emergency expense rears its ugly head – and with so many Brits suffering with low credit ratings now, oftentimes the only option available to these individuals is to take out a high interest rate short term loan from a major payday lender such as Wonga or QuickQuid.

However, availing yourself of this option can actually make it harder to repair your credit rating and eventually re-gain access to more traditional and less expensive forms of credit, as reports have emerged that payday lending activity, which appears on your credit history, has been used by many traditional lenders as an excuse to decline loan applications – even in the event that the loan was repaid in full, on time, and without incident.

lenders encourage borrowers to ‘rebuild their credit’

Ironically, there are some payday lenders who have actually advertised their services as an excellent way to begin rebuilding a positive credit history, provided a borrower repays their payday loan on time. One such lender who engaged in such activity up until recently was industry leader Wonga, whose 4,214 per cent interest rate loans make them one of the most expensive choices for a payday lender.

Wonga had at one point been sending email marketing materials to prospective customers, touting the ability of a repaid loan to strengthen a customer’s credit history. However, complaints made to several debt charities have brought the incident to light, eliciting a rare apology from the lender and a promise to discontinue the use of such advertising materials, which the lender categorised as being used in error; the fact that Wonga, one of the largest, most controversial, and at times most arrogant payday lenders operating in the UK actually apologised over the issue is a major nail in the coffin for the payday loan industry overall, industry experts agree.