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Is buy now pay later hurting your credit rating?

Updated: Jul 19, 2022

Buy now pay later (BNPL) services can be a great way to spread the cost of a purchase, but it could also affect your ability to get a loan.


The number of Australians using buy now, pay later (BNPL) platforms has grown at rocket pace, along with the number of BNPL services available. At the time of writing, there are around 15 different BNPL providers operating in Australia and seemingly more popping up every month.

How fast has 'paying in four' caught on? Very fast. In the 2020-2021 financial year alone, Australians charged up almost $12 billion to BNPL accounts. Young adults, in particular, prefer the idea of paying in instalments over using a traditional credit card.

BNPL is becoming so commonplace that one in five people report having used a BNPL service to pay for everyday household items, such as groceries, and even rent, in the past year.


Credit product that falls outside credit laws

The popularity of BNPL is due largely in part that BNPL falls outside of Australian credit regulations. Rather contentiously, this exempts BNLP services from the usual legal requirements of credit providers, such as assessing loan affordability.

How is this so? Because, technically speaking, BNPL is a payment plan. BNPL repayments break the purchase price into instalments. If you pay on time, the service is free. (Is anything really free? Critics argue that BNPL has an inflationary effect by pushing prices up.)

Sitting outside the credit code means that BNPL facilities offer an almost instant approval process. Applicants need only be 18 with a verifiable Australian address, form of ID and active bank account. Because there is no income and expense assessment, consumer advocacy groups often argue that BNPL leaves consumers vulnerable to the risks of overspending or unmanageable debt.


Ky (left) presents Andy (right) with a gift to congratulate him on his new place in Waterloo.


How does 'buy now pay later' work?

Afterpay, Zip Pay, OpenPay, PayPal Pay In 4 and so on, all work by dividing the accountholder's purchase into instalments. In the case of Afterpay, Australia's most popular BNPL scheme, four equal payments are each spaced two weeks apart.

If the service is free, how does Afterpay and their competitors make money? Firstly, the majority of BNPL income comes from merchant fees. Retailers are charged for using the payment facility. Secondly, if the account holder misses or makes a late payment, there are late fees.

How many BNPL users pay late fees? A lot. A report by the Australian Securities and Investments Commission (ASIC) indicates that 20 percent of BNPL users are struggling to make on-time repayments, with some having 10 or more open BNPL orders at any time.


Voluntary code of conduct for BNPL providers

Given than BNPL companies fly under the credit code radar, there is justified concern that the BNPL craze could grow into a wave of financial hardship. ASIC’s own review used data from six BNPL providers and four major financial institutions, including Afterpay, BrightePay, Humm, Openpay, Payright and Zip Pay.

They found that one-in-six BNPL customers was in financial trouble. More concerningly, more than half of those experiencing difficulty were aged between 18 and 32.

"From our research, we found that some consumers who use buy now, pay later arrangements are experiencing financial hardship, such as cutting back on or going without essentials — for example meals — or taking out additional loans, in order to make their buy now, pay later payments on time. There is also a risk that consumers may be paying inflated prices for some goods and services when using a buy now, pay later arrangement.” reported ASIC.

Since ASIC’s investigation, BNPL services have since committed to a voluntary Australian Finance Industry Association Buy Now Pay Later Code of Practice.​ The voluntary code includes taking accountholders' payment history into account before offering a credit limit increase, as well as other checks.


BNPL grey area can make lenders nervous

Under Australian credit laws, lenders and credit providers are obliged to assess borrower creditworthiness (ability to repay the loan) before approving any credit. Once funds have been released to the borrower and loan repayments begin, the credit provider is also obliged to record and report on the borrower's repayment history, late and on-time.

While this might sound like "Big Brother," it is in fact a form of consumer protection. It aims to prevent predatory lending to people who may not be able to afford it.

Being outside of the credit code, BNPL providers are spared from these credit reporting obligations and this is, in part, is what contributes to lenders' wariness around BNPL spending. BNPL companies may run a credit check and may report late payments and defaults, but they are under no obligation to do so.


Chris (right) delivers a housewarming gift to Evan (left) to celebrate his new place and achieving his property goals.


What impact does BNPL have when you're applying for a loan?

If a BNPL provider has conducted a credit enquiry or reported late payments on your credit file, this may directly affect your credit score. On the other hand, if your BNPL payments have always been on time, there may be no public record of them whatsoever.

But just because your BNPL purchases don't appear in your credit file, doesn't mean that lenders can't see them. BNPL repayments are made via direct debit, which means they leave bread crumbs through your bank accounts. If you're applying for a loan, it is better therefore to list any BNPL accounts than try to keep them secret.

We like to warn clients that it's not uncommon for lenders to require BNPL accounts to be closed prior to loan approval. It's not so much that having a BNPL account directly affects your credit score, but that lenders perceive it to be a potential risk.

Every situation is different and we will be able to advise you on the impact of any BNPL accounts when helping to prepare your loan application.


Tips for using Afterpay and other services

  • Be careful not to spend more than you can afford. Whereas credit card companies must seek your approval to offer you a credit limit increase, Afterpay and the like can increase your account balance without your permission.

  • Avoid linking your BNPL account to a credit card unless you’re confident of paying off your credit card in full every month.

  • Set a reminder to make sure you have enough money in your account to pay your BNPL instalments on time.

  • If you’re struggling to pay off multiple BNPL purchases, call the BNPL provider and ask them to consolidate the amounts into a single sum. This will reduce your late fees.

  • If you have a complaint about a BNPL service, you can report it to the Australian Financial Complaints Authority (AFCA).


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