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Can Afterpay affect your credit rating? The consequences of buy now, pay later schemes

Afterpay and other buy now, pay later schemes (Zip Pay, Openpay, etc.) are becoming increasingly popular, which can be seen from the company’s year-after-year revenue growth. It can be handy in a pinch and while it allows shoppers to give in to temptation every once in a while, it can easily snowball into a bunch of debts and payment streams that may be difficult to juggle and make you question “can Afterpay affect your credit rating?”

Much like many other creditors, Afterpay will attempt to direct debit payments from your nominated account at the frequency of your choosing. While this may seem like a convenient payment method, it can quickly turn into an issue of “out of sight, out of mind”. This is especially the case if you have multiple purchases on your Afterpay account, each with their own due date and specific amounts. If payments continue to fall behind, then it can be easy to accumulate an Afterpay debt that could affect your credit rating.

What can impact your credit rating?

Looking at your credit file can be daunting, especially if you’re not sure what can impact it. A bad credit score can affect your borrowing capacity and impacts your ability to achieve your financial goals, like your dream home.

There are many factors that may impact your credit score. Brought by the Australian Securities and Investments Commision (ASIC), Moneysmart discusses three examples of how your credit score is calculated:

Amount of Debt

The score on your credit file takes into account your entire amount of debt based around every credit product you’ve held within the past two years. It lists the details of all of your credit and/or loan products, ranging from credit cards to mortgages.

Payment History

If you’re a prompt payer and do not borrow more than what your means allow, then your credit rating shouldn’t be impacted.

Your credit score will contain the following from within the last two years:

  • How much you have repaid
  • Payment frequency
  • If payments were made on time
    • Will be marked as late if payments are not made within 14 days of the due date.

If payments continue to run late, then the creditor is within their rights to report your missed payment as a default (however they must advise you first before doing so). This can occur if the repayment exceeds $150, is overdue by at least 60 days and they have made prior attempts to contact you regarding this.

Defaults are not just limited to credit products as your utility and telco companies can also list them against you.

A young lady carrying multiple shopping bags over her right shoulder - can afterpay affect your credit rating?

A default can remain on your credit file for 5-7 years. If you then pay the debt, it will be marked as paid on your credit file but the default will not be removed.

Bankruptcy and debt agreements in your name are also listed and can have serious implications on your credit score.

New Credit Applications

Each attempt at a new credit product/service will be recorded on your credit file, in addition to any loan that you are listed as a guarantor on. Also, making multiple loan attempts can reflect negatively on your credit file, potentially discouraging lenders from approving your application.

The Afterpay Trap

Afterpay and all other buy now, pay later schemes can be a slippery slope for some and can land you in The Afterpay Trap. It can seem enticing when you see that shiny new coffee machine on the store shelf – it sure would fit nicely on your kitchen bench and you don’t even have to pay a cent for it upfront. But, you will pay for it later.

Some people are prone to procrastination and each time we do, we soon wish we hadn’t. Instead of “buy now, pay later”, you could instead think of it as “buy now, pain later” as your living expenses will diminish over the following weeks while you work to pay off those spur of the moment, impulse purchases.

What happens if you can’t make your Afterpay payments?

According to Afterpay’s Terms of Service as of 30 September 2021, the late fees can grow to up to $68 (depending on the original order value), which is certainly nothing to scoff at.

According to Afterpay’s 2021 Financial Year Annual Report, the company recorded a 27% revenue increase from late fees, increasing from $68.8 million (2020) to $87.3 million. Therefore, late fees made up a whopping total of 9.6% of Afterpay’s annual revenue!

A young man stressed as he's sitting down hunched over money on a table with a piggy bank and an open laptop - can afterpay affect your credit rating?

Can Afterpay affect your credit rating?

So, the big question! As Afterpay and other buy now, pay later services may be slippery slopes for some, it can quickly get out of hand and leave you with an accrued Afterpay debt. Much like credit services and utility companies, Afterpay and the like reserve the right to outsource debts to debt collectors. This is where your credit rating may be affected and ultimately, have consequences on your borrowing capacity or ability to get loan approval.

Afterpay claims it does not check credit history for new applicants, so it can be a temptation to those who already have a bad credit history. However as previously mentioned, the consequences may still put you in a position where it does begin to affect your credit rating.

In Australia, you can check your credit history with any of these three credit reporting agencies:

While Afterpay doesn’t conduct credit checks, many other buy now pay later services may. These include:

  • Zip
  • Openpay
  • Humm
  • LatitudePay
  • Klarna
  • BrightePay
  • Payright

If you do not make your Afterpay payments on time, your account may be suspended. However as the buy now, pay later business model is becoming increasingly popular, the slope may become even slipperier with other companies continuing to adopt similar models.

Can Afterpay prevent you from getting a home loan?

Having an Afterpay account (or use any other buy now, pay later service) doesn’t mean you won’t be eligible for a home loan, especially if your payments are being made on time. However, even if your Afterpay balance hasn’t accumulated into an unmanageable debt, lenders can still be wary of buy now, pay later services and may wonder why you rely on them.

As previously mentioned, these payments can get overwhelming with due dates being tied to each individual purchase, so it’s easy to lose track and find yourself with late fees or a debt that goes to collections. If the latter were to occur, this is when it can directly affect your credit score and have a negative impact on your ability to apply for a home loan.

What alternatives are there to Afterpay?

The most enticing aspect to Afterpay and other buy now pay later schemes is the instant gratification of walking out of the store with that shiny new product without having to pay a cent upfront. However if we keep these consequences in mind and reprogram our brains to think of it as “buy now, pain later”, then we can say no to temptation and keep our future goals alive.

The best way to avoid buy now, pay later schemes is to budget for the things you want. This is where MyBudget can help as we tailor your finances around your personal goals, both short term and long. Save for your dream home while putting money aside for that coffee machine, all the while ensuring your bills and commitments are being paid on time. We truly believe that by transforming your money, you’ll transform your life.

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Call 1300 300 922 or get started today

This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

All customised budgets and consultations with money experts are subject to MyBudget’s qualification criteria. We recommend that you read and consider our Product Disclosure Statement.

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