Yahoo Finance Dire five-year impact of popular app for Aussie homebuyers: 'Desperation'
Using a buy now pay later service could stick on your credit report for half a decade and that can impact your borrowing power.
Aussies have been urged to think twice about getting a buy now, pay later (BNPL) loan if they want to buy a home. BNPL services like Afterpay, Zip and Klarna have exploded in popularity in Australia as many struggle to afford big and small purchases during the cost-of-living crisis.
While they might allow you to get by, or grab that big-ticket item you've wanted for ages, it can stick around for years and haunt you when you apply for a much larger loan. Graham Doessel, CEO of MyCRA Lawyers, which specialises in credit law, says too many Aussies are signing up to a BNPL service without looking at the bigger picture.
"Be careful because it can have long-term effects on their ability to buy future items [like] borrow for a house," he said. "Read the contracts to know what it is they're getting themselves in for."
RELATED
$90,000 warning after young Aussie rejected from home loan: ‘I was shocked’
Aussie with three full-time jobs exposes reality of 'concerning' work trend: '$300k per year'
Tradie dad's 10-minute fix after losing $100,000 to common Aussie problem
When you make any type of application for credit, whether that's signing up for a credit card or applying for a car loan, that will be listed on your credit report as a "credit enquiry".
Historically, BNPL providers didn't have to do credit checks when signing up new customers because the services weren't included in the National Consumer Credit Act
But new legislation was introduced earlier this year that aimed to put BNPL under the Act's umbrella.
"What it will mean is that buy now, pay later providers will have to do some basic credit checks on people to ensure the credit product that they are signing up to is going to be affordable for the individual," Assistant Treasurer and Minister for Financial Services Stephen Jones said.
That legislation needs to pass the House and the Senate for it to officially come into law. Until then, BNPL services aren't forced to do credit checks.
According to Worldpay, BNPL accounts for 15 per cent of all online spending in Australia. Finder research found 43 per cent of Australians have used BNPL to make a purchase recently and the average customer with debt carries a balance of $867.
Shockingly, one in three have missed another bill in order to afford their BNPL repayments in the past 12 months while 12 per cent have gone as far as skipping a meal.
Credit inquiries can linger for years even after you've paid off your BNPL
You might have used a BNPL service months or even years ago and kept up with all your repayments, but it can still affect your borrowing power.
"If there's a [credit] inquiry on there, it's five years from when the inquiry is listed until it falls off [your credit score]," Doessel told Yahoo Finance.
"That buy now, pay later inquiry can affect you terribly for those five years.
"The closed account can affect you for two years. After the account is closed, it takes two years until it actually drops off the credit file."
Doessel explained that having a BNPL credit inquiry on your file won't stop you from getting a home loan, but it could reduce your borrowing power.
BNPL can make you look like a bad 'character'
Sydney resident Lou bought her first home this year, but her lender told her there were two major roadblocks in her application: her HECS debt and her Afterpay account.
“With my Afterpay debt, they saw it on my statement and said I needed to close it and send them an email with my confirmation that my account had been closed,” she explained to Yahoo Finance.
Mortgage broker Marina Michael said debt can weigh on you in different ways and not all debt is bad.
“If you cannot pay back or afford a small retail expense now, then how can you pay for your home loan? So it’s all about how it reflects to your character,” Michael said.
“HECS is not considered a bad debt, it can be great to your character that you went to uni or studied at TAFE. Whereas Afterpay is considered a bad debt because they're saying that I can't afford this small purchase and I need some assistance.”
How does your credit score get used for a home loan?
There are three main bureaus that deal with credit score in Australia: Equifax, illion and Experian.
The credit score rating starts at zero and goes up to 1,000 or 1,200 depending on the bureau. Home loan lenders will use your credit score to assess your suitability for a mortgage and the type of rates and repayments you will be able to afford.
Here is what is included in your credit score:
Your repayment history on bills and charges
How much debt you're carrying
How long you've had a credit history for
The type of credit you've received (credit cards, BNPL, mortgages)
How often you are applying for new credit
The higher the number, the better candidate you are in the bank's eyes, and the opposite applies with a low number.
Doessel said a "good" score is around the 800 mark out of 1,200, and traditional mortgage lenders will start looking at your application "more seriously" once you get your score at or above the 650 mark.
Anything less than 650 and you could be hit with higher interest rates, higher risk fees, or need to stump up a much higher deposit. Doessel said a low enough score can completely stop you from getting a mortgage.
He added that the 3 per cent minimum serviceability buffer that's applied to loans can massively affect people with credit cards and BNPL services.
"The rule of thumb is if you had a $10,000 credit card, that's $300 a month that is going to reduce your mortgage serviceability by," he told Yahoo Finance.
"[With] Buy now, pay later it could actually be a higher percentage, because you've got to pay it off so much faster. If the limit is $3,000, that's $750 a fortnight or month off your borrowing power. That would be scary when you're looking at serviceability requirements for a bloody home."
Major impacts on your credit score: 'Desperation'
An Aussie replied to one of Doessel's TikTok videos and revealed that they used Zip Pay to purchase a $5,000 gaming computer.
Despite not missing a single payment, their credit score dropped by more than 200 points.
ClearScore said payment history has the "most significant impact" on your credit score.
Defaulting on payments can massively reduce your credit score by up to 350 points depending on the bureau.
County court judgements can wipe up to 250 points, while missing your payment obligations can knock around 80 points.
Doessel said signing up to Zip Money, which is a line of credit, can reduce your credit score by as much as 250 points.
"It's seen as a level of desperation because Zip Money is at a much higher rate of interest," he told Yahoo Finance.
Get the latest Yahoo Finance news - follow us on Facebook, LinkedIn and Instagram.
