Does Buy Now Pay Later affect your credit score?

Quick, easy and convenient, buy now pay later lets you make the purchases you want, when you want. But this fast payment option can have a hidden impact on your credit score.

It’s estimated that two in five Australians have used buy now pay later (BNPL)1. You may have paid for purchases via BNPL yourself.

A growing number of providers offer BNPL including Afterpay, Zip, and humm, and even some of the big banks.

Part of the appeal is that BNPL is very simple.

Instead of paying the full price of a purchase in a single lump sum, you pay by instalments over time. This has the potential to make the cost of an item more manageable as you can spread out the expense over a few weeks or months.

In the meantime, you take purchases home the same day even though you may have made only a small initial payment at the check-out.

This can make BNPL especially helpful for unexpected purchases that you haven’t budgeted or planned for.

In addition, it is super easy to sign up to a BNPL service – and unlike traditional forms of credit, no interest is charged on purchases.

The catch is that if you fall behind with instalments, late payment fees can start to build up. And this is where problems can lie. If you run late with payments it can be hard to catch up, and the late fees can be the equivalent of a high rate of interest.

The Federal Government has announced reforms that are set to bring BNPL under the normal rules of consumer credit. Put simply, this would mean BNPL providers are required to make important checks to be sure each consumer who applies for a BNPL account can comfortably repay their purchases.

It’s a positive step to help consumers avoid spiraling debt.

But you don’t need to overload yourself with BNPL debt to experience negative impacts. It could have a far bigger impact on your finances than you may expect.

Can BNPL impact my credit score?

Yes, BNPL can impact your credit score.

Your credit score is a number that reflects your credit worthiness based on details in your personal credit report. It’s a good idea to keep your score as high as possible because lenders will look at your score whenever you apply for a loan or credit.

A high score indicates you’ve managed debt and credit well in the past, and can make it more likely that you will be approved for a loan or even pay a lower interest rate.

While BNPL may not be a traditional type of credit, it can still impact your credit score.

For instance, whenever you apply for a BNPL account, this may be recorded as an enquiry on your personal credit report, which can push your score down.

Keeping up with BNPL instalments can keep your score healthy. On the flipside, missing BNPL repayments has the potential to negatively impact your credit score.

Right now, BNPL is not covered by normal consumer credit laws. So only BNPL providers that have an Australian Credit License, such as banks, can provide details of your repayment history to credit reference companies.

This is likely to change though if BNPL providers are subjected to the same laws as traditional credit providers.

How to use BNPL without damaging your credit score.

Credit reference company Equifax2 suggests several steps that can help you use BNPL without negatively affecting your credit score:

  1. Stick to your budget: Use your budget – not your BNPL limit, when deciding whether to make a purchase.
  2. Know the costs: Understand the fees and charges you could be asked to pay with BNPL, and know whether a credit check will be part of the sign-up process.
  3. Limit your number of accounts: The more BNPL services you sign up to, the harder it can be to keep up with repayments and pay on time before charges apply.
  4. Set up scheduled payments: Setting up scheduled payments through online banking or our app can help you avoid late fees on BNPL. Be sure the funds are available in your account when a BNPL payment falls due.
  5. Check your credit score: Aim to check your credit score regularly. If BNPL accounts are recorded on your credit report, this can alter your score.

BNPL may not be for everyone.

There are alternatives to BNPL including our award-winning low-rate credit card and personal loans. If you’d like more information, contact the team at Defence Bank today. Call our Contact Centre on 1800 033 139 or visit your local branch to find out more.





Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.


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