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Is buy now pay later hurting your credit rating?

Updated: Feb 7

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 over the last years, along with the number of BNPL services on offer. At the time of writing, there are around 17 different BNPL providers operating in Australia.

How fast has 'paying in four' caught on? Very fast. In the 2022-2023 financial year, Australians charged $19 billion to BNPL accounts, up $7 billion on the previous year. Young adults, in particular, are the key demographic who prefer the idea of paying in instalments over using a traditional credit card.

BNPL is so commonplace that two in five Australians report having used BNPL in the last six months and one in five say they have 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 in part to the fact that BNPL falls outside of Australian credit regulations. Somewhat contentiously, this means that BNLP services are exempt from the legal requirements that apply to credit providers, such as assessing loan affordability.

How is this so? Whereas credit products charge interest on the loan balance, BNPL services require the user to repay the purchase price in instalments. Technically speaking, this makes BNPL a payment plan, rather like lay-by. If you pay on time, the service is free.

Whereas credit providers are required to assess applicant creditworthiness, these laws do not apply to BNPL. In fact, BNPL facilities can offer applicants almost instant approvals. Applicants need only be 18 with a verifiable Australian address, form of ID and active bank account.

A number of consumer advocacy groups have been outspoken that BNPL leaves consumers vulnerable to the risks of overspending or unmanageable debt because there is no income and expense assessment.

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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 spaced two weeks apart.

You may be asking yourself 'if the service is free, how do BNPL providers make money?' The majority of BNPL income comes from merchant fees. When a customer makes a BNPL purchase, the retailer is charged a percentage of the transaction amount. The percentage varies with the merchant's industry and sales volume, but can range from 3% to 7%, according to Afterpay.

Secondly, the consumer is liable for late fees if they fail to pay on time. 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 struggle to make on-time repayments, with some having 10 or more open BNPL orders at any time.

Navigating new BNPL regulations

The Australian Government Treasury is actively exploring three regulatory options for BNPL services, with a focus on striking a balance between consumer protection and industry growth. 


Option 1: Strengthening the BNPL Industry Code 

This involves reinforcing the BNPL Industry Code with an affordability test, including credit checks for specific lending thresholds. The proposed changes aim to make the BNPL Industry Code mandatory for all providers, enhancing marketing practices, dispute resolution standards, and product disclosures. 


Option 2: Limited Regulation under the Credit Act 

Under this option, BNPL services would require an Australian Credit License or representation of a licensee. It advocates for fee caps, explicit consumer instructions for spending limit increases, and additional warning and disclosure requirements. These changes would be complemented by a reinforced Industry Code. 

Option 3: Comprehensive Regulation under the Credit Act 

This comprehensive approach mandates Australian Credit Licenses for BNPL providers. Responsible Lending Obligations (RLOs) necessitate assessing service suitability for clients, emphasizing consumer empowerment. Proposed measures include fee caps, disclosure requirements, and integration with the credit reporting regime. 


In essence, the government is proactively addressing concerns and navigating these regulatory options to ensure responsible lending practices within the evolving BNPL sector. This initiative considers the financial well-being of consumers, acknowledging varying levels of financial literacy. 

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 designed to be a form of consumer protection. It aims to prevent predatory lending to people who may not be able to afford repayments.

Being outside of the credit code, BNPL providers are spared from these credit reporting obligations. This, 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 legal obligation to do so.

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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 can leave bread crumbs through your bank accounts. Therefore, any time you're applying for a loan, it is better to list any BNPL accounts than try to keep them secret.

Also be prepared 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 may see it as a credit 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.

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Tips for using Afterpay and other BNPL 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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UPDATED: 7 February 2024



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