Well, can it?
Here’s a common financial catch 22. You need a loan but your credit score isn’t looking good. You’re worried that even applying for a loan will trigger a credit check—and don’t those just make your credit score even worse? If only you could get a loan without a credit check: some sort of “no credit check loan.” You decide to type those very words into Google and…
Finally, some good news! “No credit check loans” exist and there are so very many options to choose from.
You decide to go with the first payday lender that pops up and you’re quickly approved. Not only did they not perform a credit check, they didn’t even check for your income. The interest rates are quite high and you’ll have to pay it back in full—with fees—in under two weeks, but you think you’ll have just enough to cover it after your next paycheck.
So, you got your loan without impacting your credit score, right? …Right?
It’s Going To Impact Your Credit Score
Not according to Randall Yates, CEO and founder of The Lenders Network.
“A ‘no credit check’ loan will actually decrease your credit score temporarily the instant you get it. Even though there is no credit inquiry involved, when the new account is reported to the credit bureaus it adds debt to your total liabilities, which is 30% of your credit score,” he told us.
But as Yates says, this is temporary, so if you pay back the loan, “your credit score will go back to where it was.”
But many of these loans are designed to keep you from repaying them. The short payment terms are no mistake. It’s a system designed to trap you.
If (or when) you find yourself unable to pay back the full loan in time, the lender will give you the option to “rollover.” In other words, you can pay a fee to extend your loan. It’s going to make things even more expensive, but what choice do you have?
You roll the loan over a couple times and now you owe even more than you did in the first place. You’re falling further and further into debt, so you just decide to stop paying.
Enter: The Debt Collector
We’ve got some bad news. Per nationally recognized credit expert Jeanne Kelly, “If you find yourself in financial hardship and miss many payments, the loan goes into collection and this will drop your score.” One of the first things they’re going to do when they start coming after you is report your nonpayment to the big credit rating agencies.1
Kelly warns, “if a collection agency handles the debt and they report an account on your credit report, it can drop your score approximately 100 points.” After all that heartache, you ended up in the exact place you were worried about.
But at least if you pay back the collections agency, everything goes back to normal, right? Sadly, no. “Unfortunately in most cases, if you pay a collection account, your credit scores don’t immediately improve,” says Gerri Detweiler, author and debt law expert.
Deweiler recently wrote an article featuring strategies for removing collections claims from your credit report, but she cautions that “for the most part you’re going to live with that damage for years to come.”
A Better Alternative And Some Good Advice
As you can tell, this is a situation you’re better off avoiding entirely, if possible. Even if you’re worried that a credit check will hurt your credit score, you could still try and apply with a lender who performs a “soft credit check.” A soft credit check doesn’t impact your credit score, so you don’t need to worry about causing damage before you’ve even taken out the loan.2 Review potential lenders carefully, ask them if they perform soft credit checks and income verification to ensure you can actually afford to repay your loan. It’s also always a good idea to read customer reviews on sites like Google and Facebook. Are the lender’s customers happy with their product and service, or are they firing off one-star reviews and threats to take them to court? As always, use your best judgment, do your research, and make sure you’re working with a lending partner who can help you, rather than a predator who will trap you in debt and further hurt your credit. You can read more in The Truth About No Credit Check Loans.
One more thing about debt collectors before we go…
Sometimes collection agencies will mistakenly report you to a credit bureau, even if you don’t have any debts with them. If you do receive a random call from a collection agency, DO NOT immediately acknowledge the debt.
Every state has a statute of limitations after which a debt cannot be collected, and there’s a chance the call is about an old debt. If you acknowledge the debt, the statute resets.
Instead, request proof of the debt. The agency is required to send you proof within 30 days. That will help you understand if it’s an actual debt you must deal with, a debt where the statute has expired, or a total mistake.
1 “How debts in collection affect your credit.” CreditKarma. Accessed on February 7, 2017 from https://www.creditkarma.com/article/accounts-in-collections.
2 Anderson, Caryn. “Does Checking Your Credit Hurt Your Credit Score?” CreditSesame. Accessed on February 7, 2017 from https://www.creditsesame.com/blog/credit/does-checking-your-credit-hurt-your-credit-score/.
3 Higuera, Valencia. “What to Do If a Debt Collector Asks for Money You Don’t Owe.” Accessed on February 7, 2017 from http://www.moneycrashers.com/debt-collector-money-dont-owe/.
Gerri Detweiler’s passion is helping individuals cut through credit confusion. She’s written five books, including the free ebook Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and her latest, Finance Your Own Business. Her articles have been widely syndicated and she’s been interviewed in over 3000 news stories. She serves as Head of Market Education for Nav, the first and only site that shows small business owners their free business and personal credit scores and tools for building strong business credit.
Jeanne Kelly, is an author, speaker, and coach who educates people achieve a higher credit score and understand credit reporting. #HealthyCredit is her motto. As the founder of The Kelly Group in 2000 and the author of The 90-Day Credit Challenge, Jeanne Kelly is a nationally recognized authority on credit consulting and credit score improvement.
Randall Yates, is the founder and CEO of The Lenders Network, an online mortgage marketplace that helps homebuyers find reputable mortgage lenders. As a part of Randall’s successful entrepreneurial career, he spends a chunk of time helping consumers understand their credit and lending his mortgage expertise to help them find the right type of loan. Randall Yates lives in Dallas, Texas with his two sons.
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