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How does buy now, pay later affect my credit score?

·4-min read
Two girls hold shopping bags and look at a phone.
Can using buy now, pay later platforms negatively impact your credit score? (Source: Getty)

Whether we like them or not, buy now, pay later platforms have completely changed the way Aussies pay for things.

Over the last few years, credit card usage has declined faster than Lindsay Lohan’s career after Mean Girls. And now, over 6 million Aussies have an active buy-now-pay later (BNPL) account with either Zip or Afterpay. That’s cray. Why? Because buy now, pay later allows you to pay back your purchase in interest-free installments.

But here’s the thing that most people don’t know: similar to a credit card or personal loan, taking out a BNPL loan can negatively impact your credit rating. And this could really hurt you down the track.

Let’s break this baby down.

Is buy now, pay later a type of credit?

This is a bit of a tricky one. Technically, you’re borrowing money from a lender (like Zip or Afterpay) to make a purchase. And you’ve agreed to pay it back in the future (yep, it’s true - read the T&Cs). Lo and behold - that’s the definition of credit.

However, legally, some BNPL platforms aren’t credit providers, because they’re not regulated by the National Credit Act.

Let’s put the spotlight on Afterpay for a sec.

Unlike most credit lenders, Afterpay isn’t regulated by the National Credit Act because it doesn’t do a credit check on its users. And why not? Well, it found a loophole: it requires users to make repayments in 60 (rather than 62) days, which means it doesn’t need to.

How else do BNPL platforms differ from credit cards?

So we know buy now, pay later platforms aren’t always credit providers in the legal sense...but they also differ from your traditional credit services in that they’re generally interest-free.

Yep, the big draw card of a buy now, pay later platform is that you can pay your purchase back in interest-free instalments.

Sounds good! But there’s a little mind-trick here:

Studies show you’re more likely to spend more money when you use credit or make online purchases because it’s a lot less painful than physically giving up your money.

And this is exacerbated with BNPL platforms because you’re not paying the full fee upfront - this leads to more purchases and larger purchases.

Now, we’re getting to a point where you can pretty much BNPL everything. Medical appointments, clothes...and even your meal at the pub! But just because you can...doesn’t always mean you should.

Yes, we hear you. When used responsibly, buy now, pay later can help you manage your budget and cash flow, but it creates a bad habit of delaying payment (and can get very overwhelming when there are 10 Afterpay payments).

Do buy now, pay later platforms check my credit score?

Afterpay doesn’t do a credit check on its users. However, other BNPL can check your credit score.

  • Zip

  • Klarna

  • Latitude Pay

  • Humm

  • Openpay

This means that opening up accounts with BNPL providers can impact your credit score, because they’re making a credit inquiry on your behalf.

How does buy now, pay later affect my credit score?

If you don’t make your ‘buy now, pay later’ repayments when they are due, it can really hurt your credit score.

Like any lender, BNPL providers will report a default to credit reporting agencies, and this will be recorded on your credit report. Default on your credit report = reduction in credit score. And that default will remain there for five years.

But it’s not just your credit score that may be affected.

If your ‘buy now, pay later’ spending is getting out of hand, this could be a signal to banks that you’re not great at managing your finances, which could affect your home loan approval.

You may want to consider using it less (aka, just for necessary purchases), and sticking to one BNPL platform rather than a few.

However, you don’t need to close your ‘buy now, pay later’ account altogether. Having one isn’t going to negatively affect your home loan application alone.

Hot tips to keep your credit score in check:

  • Try not to use multiple BNPL accounts as it can be tough to track your repayments

  • Always read the fine print (i.e. find out how much late fees are, and whether the platform will check your credit)

  • Always set reminders to pay off your payments so you’re never late

  • Try to avoid using BNPL if you are already paying off debts.

CHALLENGE!

  1. Open your BNPL accounts

  2. Write down when your upcoming repayments are due

  3. Jot those dates into your calendar and set reminders for them

  4. Make your repayments on time!

Added challenge:

  1. Print off your last bank statement

  2. See how many BNPL transactions you’ve made (and to which providers)

  3. Try and pay off all your purchases on one platform

  4. Close your account

  5. Only use one BNPL platform at a time.

The guidance and suggestions provided in Yahoo Finance's 6-Week Financial Bootcamp are of an informational nature only, and are not intended to constitute financial advice. You should make your own enquiries as to whether the 6 Week Financial Bootcamp is suitable for your own personal circumstances. Yahoo Finance does not guarantee any particular outcome arising out of your participation in the 6 Week Financial Bootcamp.

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