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?
In this article:
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.
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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.
Does Afterpay affect your credit score?
Afterpay generally does not do a credit check when you sign-up or make a purchase. However, Afterpay’s T&Cs do give it the authority to do so. When you agree to Afterpay’s terms of service, you authorise the company to make any enquiries it considers necessary to assess your capability to make payments, which may include ordering a credit report.
Afterpay’s T&Cs also allow it to report “any negative activity on your Afterpay Account (including late payments, missed payments, defaults or chargebacks) to credit reporting agencies”. This means if you miss a payment or have other negative activity, your credit score could take a hit.
Afterpay has previously rejected calls for it to conduct credit checks on all new customers. Afterpay has argued that credit checks are unhelpful for younger adults with no credit history, and often provide an incomplete picture of a customer.
How do other buy now pay later platforms affect your credit score?
Here’s the position of some other popular BNPL platforms for how using their services may affect your credit score, according to T&Cs:
| BNPL platform | Do they perform a credit check? | Do they report negative information? |
|---|---|---|
| humm | humm may check your credit score when you sign up. However, humm says this “won’t affect your credit score or leave a record on your file”. | If you fail to meet your payment obligations or commit a serious credit infringement, humm may be entitled to disclose that information to credit reporting bodies. |
| Klarna | Klarna performs a credit check when you first create a one-time card in the shopping app or the first time you pay a seller with Klarna. It may also perform credit checks for future purchases. | If you don’t meet your repayment obligations or commit a serious credit infringement, Klarna may pass this information on to a credit reporting body. |
| Openpay | Openpay reserves the right to conduct credit checks on new applicants. | If you fail to meet your payment obligations or commit a serious credit infringement, Openpay may be entitled to disclose this to a credit reporting body. |
| Payright | Payright may perform a credit check when you apply. It says it will obtain your consent before doing so. | Payright will exchange credit information about you to credit reporting bodies in relation to managing your account, including where your repayments are overdue. |
| Zip | Zip says it may perform a credit check when you apply for an account. | If you fail to meet your payments or have committed a serious credit infringement, Zip says it may disclose this to a credit reporting body. |
What are the other risks of buy now pay later platforms?
If you’re using BNPL platforms, some other risks to be aware of include:
- Fees can add up: Most BNPL providers do not charge interest and instead charge fees. This can include missed payment fees and account keeping fees. ASIC’s recent report found that BNPL providers reaped over $43 million in missed payment fees in the 2018–19 financial year, with one in five BNPL users saying they missed a payment in the last 12 months.
- It could impact your future loan applications: According to Moneysmart, lenders consider BNPL spending when you apply for loans (e.g. a car loan or mortgage).
- It may be difficult to meet your repayments: In order to meet their repayments, ASIC found that 20% of BNPL consumers cut back on or went without essentials such as meals, 15% took out an additional loan and 20% missed or were late paying other bills or loans. If you do miss payments on other bills or loan products, this could also hurt your credit score.
To help manage your BNPL spending, you might like to:
- Create a budget which accounts for essentials like food, rent or mortgage payments and bills first, then see how much you can afford to spend via BNPL platforms.
- Put a limit on your BNPL spending and stick to it.
- Set up payment reminders. If you already have automatic payments set up, make sure you have enough funds in your account before the due date.
- Try to link your BNPL account to your debit card, rather than a credit card. This can also help to avoid credit charge interest and other fees.
Cover image source: cottonbro (Pexels).
This article was reviewed by our Sub Editor Jacqueline Belesky and Finance Editor Sean Callery before it was published, as part of our fact checking process.
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