Does Buy Now Pay Later Affect Your Credit Score?

Buy Now Pay Later (BNPL) services and providers — as the name suggests — offer shoppers the ability to purchase a product now and pay for it later, usually in a series of instalments over the following few weeks. It can be a very convenient way to shop. However, many people fail to consider how purchases made using Buy Now Pay Later services could affect their credit score.

How does BNPL work?

Simple application process

Buy Now Pay Later providers simply (and generally) require you to register your details online to apply and sign up for an account to access their BNPL services. You can then use the BNPL services to shop online with ease, or in person when shopping in a store. One of the biggest advantages is that you can purchase the products straight away without having to pay in cash or use your credit cards.

Similar to credit cards

The process of buying a product using BNPL services is similar to making a purchase on a credit card with an interest-free period. With BNPL, you receive the product or service upfront just like with a credit card, but you don’t need to pay for it until your repayments are due, also just like with a credit card. You just need to make sure that you make your repayments when they fall due or other fees and charges may apply, depending on the provider.

A range of providers

You’re spoiled for choice when it comes to Buy Now Pay Later providers. Some of the most common ones are:

• Afterpay
• Humm
• Klarna
• Payright
• Zip Pay

Understand the fees

While BNPL services are interest-free, the other fees associated with BNPL services can end up being very costly. Some of the fees may include:

• late fee — if you are late paying making a repayment, you may be charged around $5 to $15.

• monthly account-keeping fee — while many providers don’t charge an account keeping fee, it’s not uncommon for some to charge a fixed monthly fee of up to $8.

• payment fees — depending on your provider, you may be charged a small amount each time you make a repayment.

• establishment fee — while many providers charge nothing to set up your account, others may charge an amount to establish the account.

If you would like to compare the amounts charged by various providers, the Australian Finance Industry Association (AFIA) website has great resources on Buy Now Pay Later fees and services.

Are Afterpay and Zip Pay interest-free?

When you shop online or in-store with Buy Now Pay Later, you are essentially borrowing money from the provider. For example, if you use Afterpay or Zip Pay to pay for goods in a shop, the BNPL provider pays the store owner, you take the goods home, and then you repay the provider with interest-free instalments. If the product costs $20, the repayments might be $5 each week over the next four weeks.

The instalments usually are truly interest-free, with no interest rates and generally no other fees associated with making repayments. The BNPL service providers tend to make money by charging merchants a fee to offer their BNPL services as a payment type and through late fees charged to consumers who do not repay their instalments on time.

The late fee might be as little as $10, which could occur if you don’t have the balance in your transaction account to pay for an instalment. While that amount may seem minor, there is data suggesting that Buy Now Pay Later providers make a good portion of their profits from late payment fees. Most people using these services to make purchases, probably can’t afford the products they are buying in the first place. If you can’t afford to pay for the product, and you’re getting hit with a late payment fee on top of that, the late fee can quickly become very costly if you have to pay it regularly.

Can BNPL affect your credit score?

The danger of BNPL services often lies in its convenience. While you are essentially purchasing goods on credit, you generally won’t need to undergo a credit check as part of the application process. It’s relatively simple for anyone over 18 to sign up and gain approval — no credit check required.

Late of missed payments may be reported to credit bureaus

If you’re not spending responsibly, BNPL can negatively impact your credit score. Some BNPL providers can report your missed payments to credit reporting agencies. This will be visible on your credit report and may reduce your chances of being approved for loans or other credit applications in the future.

Beware which bank accounts you use

Another danger to your credit score is using a credit card as the nominated account to pay your instalments. If you’re not keeping on top of your credit card repayments, your BNPL journey could end up indirectly impacting your credit history.

If you are using a transaction or everyday bank account, be aware that if you don’t have sufficient funds in your account to pay your instalments, you may be charged an overdrawn fee by your bank or financial establishment.

Can BNPL reduce my chances of getting a loan?

The idea of buying on credit may seem great, but it can create bad spending habits that can hinder your borrowing capacity.

If you ever want to buy a house or another asset in the future, virtually all lenders are going to require that you put up a sizeable deposit. The main way to get this deposit is to save for it. So, learning to save for your purchases (and avoid purchasing on credit) is an important skill to learn that will serve you well for the rest of your life.

If you apply for any loans while holding a BNPL account, lenders will be scrutinising your expenses and generally won’t look favourably on these types of purchases.

Lenders could assess the money you owe to your BNPL service providers as a line of credit, impacting the amount of money you can borrow. It’s the same sort of thing as having a credit card. Even though you might never use your card, a lender will likely assess your credit limit, not the amount of credit you use. So, your capacity to borrow will more than likely be reduced.

Lenders need to be satisfied that if they lend money to you, you will be able to pay them back without significant financial hardship. While BNPL services were designed for convenience, they can easily lead to financial hardship if they’re not used responsibly.

How can I check my credit report?

If you’d like to get on top of your credit, one of the best ways is to get a free copy of your credit report. When you apply for further credit down the track, a credit check will be performed by your lender to approve your application. Every credit enquiry will be on your credit file, as well as information about your payment history and how diligently you’ve made your monthly repayments.

Credit reporting bureaus are required to provide you with a free copy of your credit report once every three months. Credit scores can change when credit checks are performed, accounts are removed or added to your credit file, and when credit providers update or change your information.

What stays on my credit file with credit reporting bureaus?

Any defaults, debt agreements and bankruptcy can stay on your credit file for up to seven years! Any credit products or loan application that requires a credit check will register as a hard inquiry on your credit file. This is all the type of information that forms your credit history.

What is a good credit score?

There are my credit bureaus in Australia, who will rate your creditworthiness via a number between 0 – 1,200. Generally speaking, a good credit score is a score of 700+.

What is a ‘soft credit check’?

A soft credit check is when a company or credit provider checks your credit in the background on your credit report, without making a hard inquiry that will be recorded on your credit history.

Good debt vs bad debt

When deciding what form of credit to use, a good way to look at it is by assessing whether it’s considered “good debt” or “bad debt” and whether the form of credit is appropriate for you and suitable for what you want to use it for. Good debt will generally make you money in the long run and may help improve your credit rating. Taking out a mortgage to buy a home can sometimes be considered as an example of a “good debt”. Generally, you’re buying an asset that will appreciate in value over many years.

Taking out a credit card for online shopping or using a BNPL service like Afterpay may be considered as an example of “bad debt”. Your purchases made with a BNPL service will generally lose value instantly, and then you’re stuck paying them off — sometimes with high interest rates and fees. At the same time, those debts may make it more difficult for you to borrow in the future, should you want to obtain a loan to buy an appreciating asset such as a house.

Do I need to close my Afterpay account to apply for a home loan?

You don’t generally need to close your BNPL account to apply for a home loan. However, it is important to note that lenders will need to assess your financial situation to ensure you can afford your monthly loan payments, so it’s a good idea to make sure you’re managing your expenses well.

Should I use BNPL?

Like anything, if used the right way, BNPL accounts, such as those with Zip Pay and Afterpay can sometimes come in handy. However, for the most part, you may want to weigh up the pros and cons of making purchases using BNPL services, and in the long run, saving up to purchase things can usually end up saving you money on extra fees and charges.

Normal lending criteria apply. Fees and charges are payable. Terms and conditions apply.

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Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent advice regarding your legal, financial, taxation or other needs, to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information. All loan applications are subject to normal lending criteria. Fees and charges payable. Terms and conditions apply.