Does using Afterpay affect your credit score?

Are you one of the many Australians who use ‘buy now pay later’ platforms like Afterpay and Zip?

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
• Does Afterpay affect your credit score?
• How do other buy now pay later platforms affect your credit score?
• What are the other risks of buy now pay later platforms?

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.

→ You can check your credit score for free

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 does not generally do a credit check when you sign-up or make purchases. However, Afterpay’s T&Cs do give it the authority to do so. Afterpay is authorised to make any enquiries it considers necessary to assess your capability to make payments, such as 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.

→ Related: Buy now pay later in Australia: A guide to Afterpay, Zip, Klarna & more

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:

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).