How to break the vicious cycle of a bad credit rating caused by a payday loan

If you have a bad credit rating, getting back on an even keel can seem like an impossible task. Help is available and there’s no need to resort to high-cost options such as payday loans.

The Money Advice Service offers a range of alternatives to payday loans, listed by category, which makes it easy to see what your alternative options are. The site also has a quick tool to help assess your finances and suggest ways of getting things under control before you need to resort to borrowing.

If you have had a payday loan already and this has led to a bad credit rating, what can you practically do to sort things out?

New rules introduced in early 2014 brought payday lenders under the regulation of the Financial Conduct Authority (FCA). A number of operators stopped trading but many continued and the demand for short-term credit hasn’t slowed.

Firstly, understand your rights. Legally, your lender has to treat you fairly and with consideration and they should allow you a reasonable time to repay the debt. They should be able to offer you options, which may include freezing interest and charges and agreeing a more manageable repayment plan.

Don’t be tempted to consolidate your payday loans as this can make matters worse, and very quickly escalate the rates of interest.

The team at Money Facts suggests you consider alternatives such as borrowing from family and friends, using a credit card, speaking to your bank, or talking to your credit union if you belong to one.

Get help. If you are struggling to break the bad credit cycle, there are a number of impartial organisations who can help you. The charity StepChange and the government-funded National Debtline both offer support and practical help to enable you to get your finances back on track. Both websites contain easy, simple information about a range of debt-related subjects, and both offer help via email or phone.

If you’re credit rating has been affected by any type of borrowing, there are a number of things you can immediately do to help things:

  1. Make sure you’re on the electoral register – it makes it easier for your details to be verified
  2. Check all your loans and financial products are registered to the correct address
  3. Get rid of any credit cards you no longer use – cancel them fully even if there’s nothing on them, so they don’t keep showing up on your rating
  4. Speak to your lenders to negotiate a more manageable payment plan. Some lenders may agree to remove default details from your record

Whatever the reason for getting a payday loan, there is likely to be a more cost-effective alternative, so do your research. And if you are already struggling to repay, remember you’re not alone and the organisations already mentioned or your local Citizen’s Advice Bureau will be able to support you as you get things back on track.

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