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How ‘buy now, pay later' affects your credit score

Lucy Dean
·3-min read
A man wearing a face mask due to the COVID-19 pandemic walks through a shopping arcade, usually packed with tourists, in the central business district of Sydney on December 24, 2020. (Photo by Saeed KHAN / AFP) (Photo by SAEED KHAN/AFP via Getty Images)
Most Australian BNPL users don't truly understand the product they're using. (Photo by SAEED KHAN/AFP via Getty Images).

Nearly half of all buy now, pay later (BNPL) users don’t understand how those products affect their credit score, with potentially devastating consequences.

New research from BNPL service Openpay found that 62 per cent of BNPL users think all providers conduct a credit check to assess affordability, while 74 per cent think paying off a BNPL plan with their debit card can boost their credit score.

Additionally, 62 per cent believe paying off their BNPL with a credit card will help their credit score.

However, none of these statements are technically correct.

Instead, if you’re paying off your credit card on time as well, then this will help improve your credit score. And when it comes to paying off your BNPL with a debit card, it won’t make any difference. 

"BNPL providers need to take some ownership of this grey area and educate consumers about their product, particularly if they want the industry to continue growing," said chief operating officer at Openpay Theresa Abela.

"The research showed that only a quarter (26 per cent) of respondents thought BNPL companies made it clear how they would assess plan limits, ability to repay and credit report impacts. At an industry level, it’s simply not good enough."

It measured respondents’ answers to several common BNPL beliefs.

BNPL providers do a credit check on me to assess my affordability before I can use their service

While 76 per cent said they believed this was true, the reality is that not all BNPL providers will carry out a credit check before allowing users to sign up.

“Not all BNPL providers approach credit checks the same way, so if you have a plan with another provider and you aren’t aware if you've consented to a credit check, make sure you ask the question, so you aren't surprised when the time comes to check your credit score,” Abela said.

BNPL providers have to ask me before they check my credit report

Some platforms don’t carry out any checks, but others will. And some will include the right to carry out credit checks in the general terms and conditions.

However, 64 per cent of respondents believed BNPL providers have to ask before checking a user’s credit report.

Applications to use BNPL show up on my credit report

More than three quarters (77 per cent) of users believed this was true, however the reality is that this doesn’t always show up.

BNPL plans will negatively impact my credit score if I miss a payment

While one late payment is unlikely to dent your credit score, multiple may.

"Credit checks and credit scores are a confusing element of the financial system for everyone, particularly when you add cash flow management solutions such as buy now pay later to the mix alongside traditional forms of credit," said Abela.

She called on Australians to do their research before taking out a BNPL product.

It comes amid growing calls for the BNPL sector to be more stringently regulated as it grows in size. The sector is forecast to have 4 million users by 2023.

Commonwealth Bank of Australia chief executive Matt Comyn told a House Standing Committee on Economics in April that the sector is big enough now to warrant greater oversight.

“I don’t think it’s unreasonable given the size of the market, the scale of the individual players — in one instance being an ASX 20 company — to make an investment in understanding their customers’ circumstances and financial position,” he said.

“They are beyond the point where the legislation framework that applies to that sector needs to be comprehensively reviewed.”

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Image: Yahoo Finance