Wonga: Payday loans 'do wonders' for your credit rating... really?

Key Points

• Payday loan firm Wonga under fire

• Implied having payday loan could boost credit rating

• But some lenders view it negatively

The reality is often the opposite, as many lenders view the fact you've used a payday or short term loan as a negative, as it can be a sign you're in financial difficulty.

Having a good credit report is vital to qualify for a loan, credit card or mortgage, particularly as lenders are more picky than ever.

Wonga's email to customers says: "Repaying your Wonga loan on time does wonders for your credit rating!"

'Wrong' Wonga

We were alerted to the message by a user who received it last month, and Wonga has admitted it sent this email to other customers but won't state how many. The same user has also sent us evidence of the same line used in emails last year.

While the Wonga statement doesn't specifically say having a payday loan will help your credit rating, it says if you pay it off, and by implication that you therefore have one, you will benefit.

But it fails to mention, or warn customers, that even having a payday loan can make you look unattractive to other lenders.

This is because they may see you as being financially stretched, given payday loans are aimed at those with short-term money problems. With one, you usually borrow a few hundred pounds and pay it back a few weeks later.

MoneySavingExpert.com money analyst Helen Saxon says: "Far from benefiting your credit rating, payday loans can actually have the opposite effect.

"Even if they're fully paid off, their presence on your credit file can cause other lenders to turn you down flat, as it could be a sign you can't manage your money."

Lenders say 'no' to payday loans

Mortgage lender Kensington says it will not accept anyone who has taken a payday loan in the last 12 months.

Rival GE Money also says it will not approve home loan applications from borrowers who have taken out a payday loan in the previous three months, or twice in the past year (see the Payday loan warning MSE News story).

A major lender also told us that while having a payday loan won't automatically disqualify you from getting credit, it is viewed negatively. Too many negatives, including many credit applications in a short period, can kibosh a new application.

James Jones, from credit reference agency Experian, says paying off a payday loan on time can help but "some lenders might see the fact you've taken out a payday loan as a sign your finances are under pressure".

A Wonga spokesman says: "We were aware that an old version of a customer email was temporarily in use again, following some software migration.

"We can confirm the email received by a MoneySavingExpert reader is not currently in use and we apologise for any confusion caused."

Payday problems

The payday loan sector has long been the subject of numerous investigations amid concerns of sky-high fees and preying on vulnerable borrowers.

This week the Office of Fair Trading (OFT) opened formal investigations into several payday lenders over aggressive debt collection practices. It is also writing to all 240 payday lenders highlighting serious concerns over poor practices, such as encouraging borrowers to pay late so they rack up huge fees.

Also this week, Wonga admitted a junior employee made "personal, incorrect and inappropriate comments" about payday loan campaigner and MP Stella Creasy. She recevied abuse in a blog and on Twitter.

Creasy wants a cap on the cost of payday loans, which the Government is considering.