Buy Now Pay Later (BNPL) services are all the rage these days. They’re not exactly new, and the idea of getting something now and paying for it later is basically the essence of all forms of credit. But as purse strings tighten, consumers have been searching for more accessible solutions, and BNPL fits the bill.
BNPL can be a handy way to shop, but only if it’s used responsibly, as it might impact your finances more than you realise.
In the following guide, we’ll take a closer look at BNPL services and answer questions such as:
Before we get into the nitty gritty of BNPL and how they affect your credit score, let’s cover some of the basics:
Lenders look at your credit score when you apply for new credit, such as a personal loan. If your credit score is low, they may categorise you as high-risk, which means they’re more likely to reject you or charge a higher interest rate.
There are a few ways that BNPL services can impact your credit score:
Inquiries: When you first apply for a BNPL, the lender may check your credit report. Depending on the type of check that they run, it could leave its mark and reduce your credit score.
Multiple loans: If you have multiple BNPL accounts or several high-credit accounts, they may be reported to credit bureaus. Lenders are less likely to approve you for a loan if you already have many active lines of credit.
Missed payments: Opening multiple BNPL accounts could place a strain on your finances. It means you’ll have more payments to make every month, and if you miss one of these—whether because of an oversight or a lack of funds—it could greatly impact your score.
Credit utilisation: Depending on the size of the credit line, your BNPL could increase your credit utilisation, which measures your total available credit against your accumulated debt.
As an example, let’s imagine that you use a BNPL to purchase a new computer.
You’re in a tight spot financially, but your old computer has seen better days and you’re lured by the promise of a buy now pay later deal.
You make a downpayment at the point of purchase and then promise to spread the other payments over several weeks.
Although you have every intention of repaying the loan, you find yourself short before the first payment and are forced to miss it.
That missed payment then appears on your credit report and reduces your score. As a result, it becomes much harder to get approved for future loans (including car loans and mortgages). And that’s not the end of it, as you still have an active BNPL loan to repay and may have lost points when the account first opened.
Missed payments, high credit utilisation, and lots of accounts can reduce your credit score. Once that happens, you’ll be a high-risk borrower in the eyes of all lenders.
Some lenders will refuse you outright; others will simply charge you a higher rate of interest or give you a smaller line of credit.
If you’re wondering why you never seem to get the advertised APR, it’s probably because your score is lower than the average.
There are bad credit loans available if your score is low. Bad credit loan eligibility is usually a little more relaxed, but rates are higher as standard and you may be hit with penalty fees if you don’t meet the terms of the agreement.
BNPL services are a great solution for easing the burden on your finances while making a necessary purchase. But as with all financial products, they must be used responsibly.
Here are some tips for using BNPL loans responsibly:
Check the terms: Many BNPL services don’t charge interest, but they may charge fees. The repayment terms and penalty fees can also differ by provider, as can the checks they do and the mark they leave on your credit report. Always check the terms and conditions in advance to discover where you stand.
Pay on time: Payment dates are not a suggestion; they are a necessity. Put those dates in your calendar and make them your priority. Missing a single payment can hurt your credit score.
Don’t get too many: Don’t take too many BNPL loans at once. It might be tempting to spend liberally, especially when you have Christmas and birthday presents to buy. But you’ll have to repay that money eventually. Only use BNPL if you’re 100% sure you’ll have the money by the payment date.
Check credit reports: All three credit reporting bureaus (Equifax, Experian, and Illion) are required by law to provide consumers with a free credit report every 3 months. Take advantage of this offer and check your credit report regularly. Premium services are also available and many of these will send you alerts when your credit score changes.
Buy now pay later loans can help you to spread out large payments and get you through difficult times, such as when you are weeks from payday and need to make a big purchase. But they’re not problem-fee and, in most cases, they’re not fee-free or hassle-free either.
Always read the terms and conditions, understand what impact they have on your credit score, and repay them within the specified timeframe.
Consult with a financial advisor if you need more information about these loans or if you’re dealing with the fallout resulting from missed payments and defaults.