Is 'buy now pay later' hurting your credit rating?

Updated: Mar 6

Buy now pay later services can be a great way to spread the cost of an item, but can also affect your credit score.

The number of Australian consumers using buy now, pay later platforms has nearly doubled in a year, according to a review undertaken by the Australian Securities and Investments Commission (ASIC). But with one in five consumers struggling to make repayments, there is a growing concern about vulnerable consumers facing financial hardship as a result of taking on too much debt. Consumer advocates are now calling for more regulation around this type of credit.

ASIC’s review used aggregated data from six buy now, pay later providers and four major financial institutions, including Afterpay, BrightePay, Humm, Openpay, Payright and Zip Pay.

Along with its review into the growth of the industry, ASIC also looked at consumer research into behaviour and experiences with buy now, pay later arrangements.

"From our research, we also 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,” the report stated.

"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."

The buy now pay later (BNPL) industry is booming in Australia. According to ASIC’s recent report into the industry, the amount of credit taken out through BNPL services almost doubled in the 12 months to June 2019. There are also more than 6.1 million open BNPL accounts, which represents about 30% of the adult Australian population, it said.

So if you use a BNPL platform, what impact does this have on your credit score and your ability to take out credit or loans in the future?

Fees instead of interest

The basic difference between buy now pay later shopping and a credit card is you don’t pay interest on top of your purchases. Instead, you pay a set of fees. For instance, PayRight charges a one-off fee of up to $89.95 to set up your account, which is added to your balance. It also charges a monthly fee of $3.50 and a $2.95 payment processing fee every time you make a payment.

PayRight is just one example and other operators have lots of different fee structures. Some charge monthly fees and joining fees and most charge late fees. For instance, Afterpay charges a $10 fee if you miss a payment. It also locks down your account until you make the payment. This rule is part of its responsible lending policy. Afterpay and others will also send you a reminder if you’re late making a payment.

Also, remember if you pay with a credit card you might accrue interest on top of the fees you pay through one of these services. So be careful how you use these services because fees can add up really quickly. Before you know it, you can have hundreds or even thousands of dollars to pay off just because you’ve bought a new TV, fridge and some bedsheets.

Technology is your friend when it comes to managing your payments. For instance, Klarna’s app has a great feature that shows you when your next repayment is due, centralises your repayments and sends you a reminder two days before a repayment.

How does it affect my credit report?

Registering with buy now pay later services can sometimes require a credit check which might affect your credit score. For instance, services such as PayRight notify you when they do a credit check. You’ll get an SMS when you apply to be a customer asking for your consent to do a credit check. Additionally, a record of a transaction may go on your credit report if you default on or are late with a payment.

Many other providers may also check your credit report before they allow you to use their service. Afterpay’s terms and conditions state it reserves the right to check your credit report.

There are differences between regular loans and buy now pay later shopping when it comes to your credit report. For instance, your credit report will show if you have always paid off your loans on time. But it won’t indicate if you have an unblemished record paying off your buy now pay later purchases.

Nevertheless, there can be serious consequences if you don’t meet your scheduled buy now pay later instalments and your credit report is impaired. It could mean a lender knocks you back for a loan down the track. Or you could end up paying a higher interest rate.

Buy now pay later shopping can work for you if you have a secure job and regular income. But you need to be disciplined about not accruing too much debt and paying your instalments on time.

Above all, avoid getting over your head in debt just because you’ve maxed out your buy now pay later account. Always spend responsibly because it’s not worth compromising your credit record and ability to take out a credit card or mortgage down the track.

Buy now pay later and credit scores

Most BNPL providers say they may perform a credit check on you. This could be done when you apply for an account, and some providers may also do this when you make a transaction to make sure you can make the repayments.

Credit checks carried out by credit providers are usually recorded on your credit report. While this won’t necessarily hurt your credit score, it will be visible to other lenders who look at your report. You do have to be careful if you’ve already made lots of applications for credit. If you make a number of applications for credit within a short space of time, this may flag you as a greater risk and negatively impact your score.

In addition to credit checks, most BNPL providers can also report negative activity on your account to credit reporting bodies. This includes missed payments, defaults and serious credit infringements. This can lower your credit score and will stay on your report for a period of time. For example, information about your repayment history (including missed payments) will remain on your report for two years, defaults will stay for five years and serious credit infringements will remain for seven years.

Let’s take a look at what the major BNPL providers’ policies are on credit checks and how using them could impact your credit score.

Do you need to close your BNPL account to get a home loan?

Just because you have a BNPL account that you use doesn’t mean you can’t get a home loan. As we’ve mentioned already, these services don’t instantly have a negative impact on your credit score, and might even be better than a credit card in the sense that the lower credit limits of BNPL platforms compared to credit cards could be viewed by a lender as a lower potential debt ceiling.

Generally speaking, you don’t need to close your account when applying for a home loan. But depending on how you use it, having an active BNPL account could lower your chances of being approved for the loan. If you often miss BNPL repayments and have to pay late fees, or have previously defaulted on a repayment, then a lender could look at this and see you as an untrustworthy borrower, just as they would if they saw:

  • Too much reckless spending (i.e gambling)

  • Too much debt (like car loans, credit cards etc.)

  • Too low an income or a poor history of savings

But the inverse also applies if you’re a responsible BNPL user. The responsible lending conduct credit licensing guide from ASIC says that a lender can look beyond your immediate credit history to see if you can repay a loan based on your spending habits. If you regularly meet your commitments and don’t use it too much, then it shouldn’t stop you from getting a home loan approval.

My Finance Agent can provide you guidance in relation to your credit score to ensure you have the best possible understanding of whats involved. Talk to one of our team on 02 8313 8400 to order your credit score rating.

*Information within this publication has been sourced from ASIC, Canstar, and MortgageExpress.