How does buy now, pay later affect my credit score?
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.
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Also read: What’s credit – and how can it help me achieve my financial goals?
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Also read: The 4 biggest things messing with your credit score
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).
