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Credit health affected by Afterpay, Zip

Greta Stonehouse
Experts warn Millenials' spending habits today could negatively affect their credit health later on

Millennials signing up to payment services in an effort to avoid credit card debt may not be aware that buying now could mean paying later with their credit health.

Maddy Lalic was in her teens when she signed up to a leading buy now, pay later provider. The application was approved and her spending soon exceeded the $300 per week she earned as a casual.

"It sounds kind of bad, but you feel like you're not actually spending money when you spend it like this," said Ms Lalic, who says she uses Zip Pay for beauty treatments such as lip fillers and laser hair removal, and Afterpay for clothes and accessories.

She says she always makes repayments on time, but her habits showed up unexpectedly last year when Maddy - now in her twenties - applied for a car loan.

She was eventually given the loan, but the experience was indicative of the scrutiny consumers can expect as a result of tighter lending standards and banks' increased access to credit-related histories.

Heather McGovern, marketing manager of ASX-listed lender MyState, said both positive and negative payment behaviours are now taken into consideration by lenders when deciding whether to approve a large loan.

"What a bank now needs to do is a lot more rigorous than it had to before the royal commission," Ms McGovern said.

"Does this person have a borrowing history, and are they spending discretionary money on these types of things?"

Zip and Afterpay are not defined as credit providers because they do not charge interest, and therefore do not need to assess a person's financial situation when they sign up.

But the impact on credit history from buy now, pay later services stems from the fact some make credit inquiries each time a certain amount is spent.

If multiple inquiries are made in a short space of time, a consumer's overall score may be lowered, which in turn could restrict access to future loans from other financial institutions.

"A lot of millennials don't see buy now pay later services as a credit product, which they definitely are," Geri Cremin, CreditSmart's credit reporting expert, told AAP.

"For a lot of younger people it will be one of their first credit contracts - it's the start of their credit profile moving forward, even before a telco contract - and it's worth keeping in mind the purchasing behaviour today will impact later on down the line."

The overall number of Australians using Afterpay, Zip and others surged from 400,000 in 2015/16 to about 2 million two years later, according to ASIC data.

Millennials aged between 18 and 34 are the fastest adopters of buy now, pay later services, and the sector is growing still.

Citi Australia recently partnered with online retailer kogan.com to offer credit card customers instalment payments, while Commonwealth Bank has invested $100 million in Klara, one of Afterpay's key rivals in the US market.

Australians will soon owe buy now, pay later companies approximately $1 billion and, according to the Consumer Law Action Centre, about one in six users cannot make their repayments on time.

Afterpay says 95 per cent of its payments do not incur a late fee, although it did record $46 million in late fees in the last financial year.

"This is very concerning for us because that's money for someone that can't make the payment and is being hit with the additional fee," Consumer Law's Patrick Sloyan said.

Some buy now, pay later services say they have tightened checks on users since the financial services royal commission.

In July 2018, Afterpay partnered with an external third-party ID verification agency to further curtail underage users of its service.

Zip Pay says users have thorough ID checks, and spend limits are incrementally increased based on customer behaviour.

"We're seeing a growing number of consumers, particularly millennials, moving away from traditional credit options and demanding simple, more flexible, transparent and responsible credit models," Zip Co co-founder and director Peter Gray told AAP.

Zip's customer base has grown to more than 1.3 million users across Australia, while, in the 12 months to March 2019, the number of credit card accounts has dropped by more than 1.5 million, according to recent Reserve Bank figures.

According to research from Credit Smart, millennials are twice as likely as their older peers to be aware of the new credit reporting regime - which includes behaviours such as repaying loans on time - introduced last year.

Nonetheless, they still don't fully understand all the implications of habitually using buy now, pay later services.

MyState's Ms McGovern says ease of access makes signing up a compelling proposition despite the future risk.

"It's really easy to sign up online and it's very quick, the whole experience is really clean and easy, connected right through to the point of sale," she said.

"It feels less risky."