Can Buy Now, Pay Later (BNPL) affect your credit score? And everything else you need to know
Buy Now, Pay Later (BNPL); Is it a new financial trend, or just a modern twist on an old idea? Letting you enjoy the satisfaction of a new purchase without the immediate hit to your wallet, but have you found yourself asking, what are the BNPL side effects? More specifically, will it affect your credit rating?
In this article, we will answer this very important question; and we will also get to the bottom of everything else you need to know about BNPL schemes. From how they work, when your credit rating is impacted, tips to using it wisely and available alternatives. Let’s unpack the world of BNPL and find out what it means for your financial health.
What is Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later (BNPL) has become a major player in our financial game, letting you grab what you want now and settle the bill later. It used to be all about splurging on fashion and home décor, but now it’s creeping into everyday essentials like groceries and fuel, especially as people juggle the pressures of the cost of living crisis.
BNPL giants like Afterpay, Zip, Openpay, Humm, and Klarna make it easy to break up your purchase into bite-sized payments over time. But before you get too complacent, remember: while BNPL can seem like a helping hand, it’s important to know the facts and use it wisely. Without careful consideration, you might find yourself in a web of debt faster than you can click “Pay in 4.”
Is Buy Now, Pay Later a type of credit?
Yes, BNPL is a type of credit, but with its own flair. It’s like the distant cousin of traditional credit, showing up with less formality but still playing by some of the same rules.
You don’t need a credit card or a big loan application to access BNPL, but it still operates on credit principles. While some BNPL services might not check your credit score initially, they could still impact it at any time. So, it’s credit, but with a laid-back vibe that is cleverly marketed to us, as an easy financial solution.
Why is BNPL so popular?
The rise of BNPL isn’t just a passing trend. So what makes it the go-to choice for so many? In March 2024, Finder found that 40% of Aussies had used a BNPL service in the 6 months prior and it’s worth noting that 20% of those admitted to paying late fees for the service.
The top reasons shoppers opt for BNPL are:
Ease of sign-up: The approval process is so easy, it feels almost too good to be true. Download an app, enter your details, and bam—you’re approved, all while you’re still standing at the checkout
No interest: 51% said they preferred BNPL as there were no interest payments
Only option: 21% said it’s because they were rejected for a credit card
Other reasons may include:
Instant gratification: The joy of receiving something now and paying for it later can be hard to resist. BNPL lets you indulge in those impulse purchases with barely any immediate consequences.
Widely available: BNPL options are available at almost every store, making it tempting to use them for even the smallest of purchases. But with their growing use for essential living costs like groceries or fuel, it’s worth considering if this easy access to credit reflects how companies might be capitalising on the challenges people face during this cost of living crisis.
While BNPL can seem like a win-win, it definitely comes with potential credit risks. Stick with me as we dig deeper into the complexities of BNPL to see what’s really at stake.
How does BNPL work?
BNPL services let you take home your purchases now and worry about the bill later, breaking the cost into seemingly manageable payments. It’s like a shopping spree with a payment plan that kicks in after the dopamine rush is gone. Let’s take a look at how a BNPL account might look for you:
No traditional credit checks
Most BNPL services skip the traditional credit checks. Often, setting up an account is as simple as downloading a mobile app, entering your details, and receiving instant approval. It might feel like VIP access to instant cash, but remember, if you miss a payment, the damage to your credit score will catch up with you ‘later’. Maybe that’s what they really mean when they say “Buy Now, Pay Later“.
Making purchases and paying by instalments
- Shop and choose BNPL: At the checkout you would select BNPL as your payment option, often via an app, digital wallet, or when making online purchases. The store will have stickers or flyers displayed advertising which BNPL service they are affiliated with.
- Divide the cost: The BNPL company splits the total purchase amount into agreed instalments over a set period
- Automatic Payments: Regular payments are directly debited from your account according to the schedule.
- Tracking purchases and payments: The BNPL apps usually monitor your balances and upcoming payments and have notifications for when direct debits are about to happen.
Fees and other BNPL charges
Let’s look at fees and charges, the not-so-fun part of BNPL. Late payment fees are the big one; miss a payment and not only will your account be on-hold, you will have a late fee added to your account.
Here are some examples of BNPL providers’ fees and charges, just remember each company will have varying rates, so it is wise to check out the terms and conditions of each provider for potential extra costs lurking in the fine print.
- Establishment fees: While most providers do not charge a fee to join, humm outline on their website that they charge between $30 – $110 for larger purchases
- Transaction fees: Consumers typically pay no fees on any BNPL transactions as long as they make their instalment payments on time
- Late fees: If you miss a payment, Afterpay says you can expect a late fee of up to 25% of the purchase price (capped at $68). Klarna customers also have a late fee, however, they have the option to ‘extend their due date for a fee’ if they think they won’t be able to pay on time
- Monthly account-keeping fees: You’ll be paying $3.50 per month to have an account with PayRight
- Payment processing fees: PayRight also charge a hefty $2.95 just to make a payment
In the event of non-payment, you may also have to pay your own bank fees
- Overdrawn fees: If your account doesn’t have enough funds to cover your repayments, some banks will hit you with a fee for overdrawing
- Interest: If you’re using a credit card to make your payments and are late paying your credit card bill, you’ll receive additional interest charges
BNPL schemes are designed for ease and appeal, but remember, a big chunk of their profits are made up of late payments fees. Their business model thrives on the hope you’ll miss a due date. Definitely food for thought!
What happens if you can’t make your BNPL payments?
As a first step, most BNPL companies will place a hold on your account if you miss a payment, preventing you from making any new purchases and getting into further financial difficulty. Missed payments can lead to late payment fees and potential negative effects on your credit score. It’s essential to understand the terms and be prepared for the financial implications if you miss a payment. Most companies will cap their late fees and if you completely avoid payment, they have the right to report the default to the credit bureau and send your unpaid debt to a third-party collection agency. This default on your credit file could really hurt your credit score and affect your ability to gain approval for other credit products – like a home loan, personal loan or a business loan.
What is a credit score?
A credit score in Australia is a number that shows how trustworthy you are with borrowed money, calculated by one of the three major credit bureaus: Equifax, Experian, or Illion. Each bureau operates independently, so you might have three slightly different scores.
This number ranges from zero to 1,000 or 1,200, depending on the bureau. Lenders use it to gauge your financial reliability.
A ‘good’ credit score can land you lower interest rates and better terms. A ‘bad’ score? Expect higher rates, limited borrowing power, and fewer lender options. So, that little number? It’s a big deal.
What makes up your credit score?
The exact formula for your credit score is a closely guarded secret, but we know what factors play a role in establishing whether you might be a credit risk. Here’s a simple breakdown:
- Repayment history: Are you paying your bills on time?
- Total amount owed: How much debt are you juggling?
- Length of credit history: The longer your credit history, the better.
- Types of credit: A mix of credit cards, loans, and mortgages can be a plus.
- New credit: How often are you applying for new credit lines?
These factors blend together to create your unique credit score.
How does Buy Now, Pay Later affect your credit score?
Initial setup
Not all BNPL providers perform a credit inquiry when you sign up. Afterpay claims that the only time a credit score will be affected is if you apply for a limit increase or you are sent to their collections agency for non-payment. Klarna on the other hand advises they will make an initial soft inquiry on your report, and again in 12 months if you make another transaction or update your address. A soft inquiry will be visible on your credit report but will not impact your credit score. However, other lenders might still see these inquiries.
Missed payments
If you’ve missed a payment for over 60 days and owe more than $150, your credit provider or their nominated collections agency can list a default on your credit report. They’ll notify you twice about the overdue payment before this happens. This default sticks to your credit report for two years, even if you pay off the debt. If you make a hardship request, that information can remain on your credit report for one year. This listing can make future borrowing trickier since it’s visible to potential lenders. Here’s a more detailed breakdown of the Australian Government’s OAIC default listing rules.
Multiple BNPL accounts
Having multiple BNPL accounts can signal financial instability to lenders. It might make them wary of your ability to manage credit effectively.
Risk of overspending
BNPL encourages spending beyond your immediate means, potentially leading to financial strain. The convenience of deferred payments can lead to a cycle of debt.
Paying credit with credit
Using BNPL credit to cover existing debts can create a dangerous debt cycle. Relying on credit for regular expenses can lead to accumulating more debt and financial stress.
Can BNPL improve your credit score?
Regularly paying off your BNPL instalments might reflect positively on your credit score, showing you’re reliable with your payments. However, this benefit is limited. Not all BNPL providers report positive payment history to credit bureaus, so while missing payments can hurt your credit score, on-time payments might not help it as much as other types of credit. Take a look at the providers FAQ’s or terms and conditions to find out if this is part of their service.
Can BNPL affect my home loan eligibility?
Using BNPL services doesn’t automatically disqualify you from getting a home loan, but it can create challenges. Lenders may scrutinise your BNPL activity and consider it when assessing your loan application. Missed payments or multiple BNPL credit applications could raise red flags, impacting your eligibility for home loan approvals.
Tips for using BNPL wisely
BNPL can be a handy tool if you know how to handle it. But like any financial product, it comes with its own set of risks. Here are some practical tips to help you navigate this type of credit and make the most of it without free-falling into debt.
Don’t rush – Read the T&Cs
Impulse shopping might be fun, but signing up for BNPL on the spot can lead to buyers regret. Read the FAQs and dissect their terms and conditions. Those documents hold the secret to avoiding surprise fees and managing your payments like a pro. Research all of the options and understand the long-term implications.
Stick to one BNPL provider
Imagine you’ve got groceries, fuel, and clothing spread over three different BNPL providers. Each purchase has a different due date, amount, and rules. Keeping track of it all? Absolute chaos. Simplify your life and avoid this headache by sticking to just one BNPL account. It will help you minimise credit report inquiries and manage your payments more effectively.
Budget for BNPL purchases
Treat BNPL payments like any other expense in your budget. Plan for them, so they don’t sneak up and blow your budget. A little foresight goes a long way in keeping your spending in check.
Keep track of BNPL payments
Set reminders, use apps, or even stick Post-it notes on your monitor—whatever helps you stay on top of your BNPL obligations. Avoiding late fees and protecting your credit score is all about staying organised and vigilant.
Alternatives to BNPL
If you’re concerned about the potential impact of BNPL on your credit score, there are alternative options:
- Create a budget: Budgeting is key to creating good financial health. Figure out where your cash is going, set spending limits and start budgeting for the life you want. The peace of mind knowing money is set aside for life’s expenses is much better than taking a debt detour
- Save your way to success: Want to go on a holiday? Channel your inner squirrel by building a savings fund that will eliminate the need for any BNPL schemes. Imagine the feeling of paying for that holiday with cash you’ve saved. Sure beats having a costly holiday hangover!
- Need help? MyBudget is your go-to for helping you achieve the financial life you dream of. We work together to create a budget that suits your lifestyle and helps you reach your financial goals without having to rely on credit. So when you need those groceries, new shoes or a holiday the money is right there waiting for you!
Future BNPL regulatory changes
In March 2024, The Albanese Government announced a shake up with a new draft legislation aimed at reigning in BNPL products. While BNPL has been a game-changer, boosting the Aussie economy and supporting jobs, they’ve been flying under the radar without the usual credit product checks. This lack of oversight can mean excessive default fees, poor dispute processes, and the risk of financial hardship to its customers.
So, what’s changing? The new rules will bring BNPL into the same regulatory world as other credit products. BNPL providers will need an Australian Credit Licence and must play by the Credit Act rules, covering everything from transparent product info to proper dispute handling. The aim? To keep you better protected. The final bill will be introduced to Parliament later in 2024.
The key to keep your credit score sparkling
Buy Now, Pay Later services might offer an instant fix, but it’s essential to understand how they work and their potential impact on your credit score. With responsible use, BNPL can be a handy tool, but good financial health isn’t about quick fixes; it’s about building a solid foundation that supports your goals and dreams. So, enjoy your purchases, but let’s do it in a way that keeps your credit score protected. Remember, the best things in life are worth waiting – and saving – for!
If you’re feeling overwhelmed with Buy Now, Pay Later accounts and unsure of where to turn, MyBudget is here to help. With over 25 years of experience, we’ve supported more than 130,000 Aussies to get out of debt and reach their financial goals. Enquire online or call 1300 300 922 and speak with our caring budgeting specialists. Our goal is to make managing your finances easier, so you can focus on what matters most. You don’t have to navigate this alone, let MyBudget help you gain financial peace of mind!
Cheryl is part of the My Budget Corporate Finance team and takes care of the company’s finances with the same care that MyBudget extends to their clients budgets. She speaks from the heart about relevant financial topics, reflecting on her own personal journey through separation, single parenting, budgeting, investing and beating cancer.