Every adult in the UK has a credit file which is essentially a log of your borrowing activity. It helps lenders assess your creditworthiness to make responsible lending decisions. There are things you can do to improve your credit score, and equally there are things you might have done or continue to do which reduce your credit score.

Your credit file is made up of loan records and data entries from credit reference agencies (CRAs). Lenders will update the CRA they work with, and the CRA will update your credit file. Any information that gets recorded to your credit file will stay on there for six years, so it’s important to check it regularly to make sure the information is correct. It’s also good to think about your future when deciding whether to borrow money, because while you might not see any immediate damage to taking out several loans, you might later find applications for a mortgage or large personal loans from the bank are rejected because of information on your credit file from half a decade ago.

Now, this doesn’t mean you need to be paranoid about your credit history. Lenders understand that it’s uncommon to go your entire life without taking out some form of credit, however you do need to be responsible and only apply for loans or credit cards when you really need to. For example, if your tyre pops and you drive to work, then a loan to get a replacement tyre is a responsible decision because you need your car in order to get to work. However, if you take out a loan to buy a new pair of shoes because you just think they’re nice, then it’s maybe not so responsible – especially if you could just wait a few more days or weeks until you get paid.

So, how do short term loans affect your credit file?

Like every application for credit, a hard search will be conducted on your credit file and this forms part of the lender’s creditworthiness and affordability assessment. This hard search is visible on your credit file to other lenders. Therefore, it’s usually a good idea to leave a bit of time between applications if you find you are being declined, or even contact the lender directly to find out why you’ve been declined. It might be something easy to fix like being registered on the electoral roll or it could be a Default that was registered to your credit file without you realising.

If you apply for credit and your application is approved, the application will still show on your credit file, but so will your now open loan. A loan or revolving credit product will show as ‘open’ until it has been settled. As CRAs can take up to a month to update your credit file, sometimes the information is outdated for a short period.

As long as you make your repayments on time, there will be no negative information recorded on your credit file.

However, if you miss your repayments and you fail to arrange an alternative agreement, this is where your credit file can start to be negatively impacted. First, the loan record will likely be updated to ‘overdue’. This will show other lenders that you haven’t made your agreed repayments. If you think you might miss your repayment, get in touch with your creditor straight away. As we mentioned earlier, CRAs can take up to a month to update your credit file and you don’t want a loan showing as overdue for 30 days if you could have rectified the issue almost immediately.

If the loan is left overdue for some time, lenders may record a Default on your credit file. A Default record on your credit file means that your relationship with the lender has broken down. If your circumstances do not allow you to make a full payment on time, it's important that you stay in touch with your lender and make at least some payments towards your debt to show that the relationship is being maintained. A Default on your credit file can be a red flag for future creditors as it shows that you missed your repayment and left it overdue for a long time.

Defaults will show on your credit file for six years, so they can be quite serious. Even if you can’t pay your arrears in full in one go, you should still contact your creditor as soon as possible. It might seem daunting if your finances have recently taken a tumble, but your creditor will want to arrange a fair and reasonable repayment option for your remaining balance. It doesn’t help them for the loan to be left overdue and unpaid, so most creditors will happily arrange a reduced repayment plan for a temporary period of time in order to allow you to recover from any recent income shocks, if you can’t repay the sum quickly.

Ultimately, a short term loan will affect your credit file in the same way as most loan products: settling loans on time can actually help you improve your credit score as it shows lenders that you borrow responsibly, but failing to make your repayments can have serious consequences.

There are free services that allow you to look at your credit file so you can see what information has been recorded and if you need to start improving your borrowing habits. Lenders don’t get the same view of your credit file as you do but the overall picture that you get to see will be similar.

In short:

  • Entries remain on your credit file for six years
  • Lenders use your credit file to make responsible borrowing decisions
  • Repaying on time can help improve your credit score (so can being on the electoral roll!)
  • Missing your repayments can cause serious money problems
  • Only borrow when you absolutely have to and make every effort to meet your agreed repayments!