The New Way Of Spending: Buy Now Pay Later And Your Credit Score

If you did online shopping during the lockdown, chances are high that you came across Buy Now Pay Later. With shops staying closed all over the world, the online sector experienced a new high. Some companies were well equipped already, others had to react quickly to move their sales online.

The trend of Buy Now Pay Later

While more and more shops are reopening again, the crisis managed to prove a point: The trend goes towards online first. Buy Now Pay Later (BNPL) services like AfterPay, Zip, or Humm experienced a boost of 22% and have become progressively more popular.

Let’s have a closer look at Buy Now Pay Later and does it affect your credit score?

What is Buy Now Pay Later (BNPL)?

If you want to make a purchase but don’t want to spend the money at once, buy now pay for it later is the way to go. As the name suggests it allows you to split the full price over multiple payments. There are multiple providers (Zip and AfterPay being the most popular ones currently) that offer these instalment schemes.

However, you can’t endlessly spend. Each account has a set limit, depending on the provider. To purchase through a BNPL account, the shop you are buying from has to offer this service as a payment method. You will have to set up an account and link it to a debit or credit card.

What you can purchase

There is a wide range of products that can be purchased with BNPL these days. Most retailers offer options to defer payments but also medical providers like dentists also often allow you to spread payments over multiple payments.

If you would like to purchase a product through BNPL, check with the store which options they offer to you. Just be aware that most likely, you can only make purchases up to a certain amount of money as your BNPL provider will restrict you to a set credit limit with them.

How Buy Now Pay Later Works

Similar to a credit card, BNPL providers charge stores a small fee for using their service as a payment method. You can sign up for a PNBL service directly through the page you are purchasing from. Once you are signed in, you will learn about the payment terms and what your instalments will look like. Your account will be linked to a credit or debit card, so your payments will go out automatically.

While splitting the payment is interest-free for you, your account may come with associated fees such as set up fees, monthly fees, and penalty fees for late payments. Especially for smaller purchases, it’s worth doing the maths upfront to see if you might save money by paying it all in one go.

How Coronavirus affects our spending habits

Retailers have been bracing themselves for large cuts in their revenues due to Coronavirus. Thousands of Australians have been stood down and have to be more mindful with their spendings while others don’t feel comfortable entering crowded stores again, even with the necessary restrictions in place. Many customers have been shifting their shopping to ordering online and either ‘click and collect’ their items from shops or get them delivered to their doorstep.

Fewer people were getting cash out over the last few months, ATM withdrawals have plunged by nearly a third. Meanwhile, contactless payment methods are on the rise and BNPL experienced a 22% increase since Corona hit Australia. While the restrictions ease off and many stores return more or less to business as usual, the pandemic may have changed the way we spend money in the future.

Does Buy Now Pay Later affect my credit score?

Your credit score is a number between 0 and 1,200 that represents your creditworthiness to potential lenders. It is based on your credit report including factors like your credit accounts and your current and previous repayment history. Your credit report logs any requests that companies make when checking your creditworthiness. So, how about Buy Now Pay Later accounts?

That depends! You should be very mindful when setting up BNPL accounts as some of them will conduct a credit check. Every one of them may check your identity through a credit bureau, however, that does not always affect your credit report.

Like any other lender, BNPL providers can make two different types of enquiries: Soft enquiries can be used to identify you and get a quick overview if you are capable of making frequent payments and won’t leave a mark on your credit score. In contrast, hard inquiries request your full credit report and will be noted. They can have a negative impact on your credit score, therefore, you should check what sort of enquiry a BNPL company will send.

BNPL providers and credit checks

We have gathered a list of the most popular Buy Now Pay Later providers and their attitudes towards credit checks. However, their regulations can change at any time and you should always do your research before you sign up for any service on their costs and fees and how having an account with them may affect your credit score.

While no credit check may sound like a great advantage at first, it comes with a fair bit of risk. It is much easier to overspend on BNPL as you are more likely to make a bigger purchase that you may not want to afford in one go. Plus, a whole lot of little purchases could, if you’re not careful, add up to a fair amount in fortnightly or monthly repayments.

Positive payment behaviour on BNPL won’t improve your credit score while an entry for a late or missed payment will still hurt it. Therefore, it is important to use BNPL responsibly and to make your payments on time.

What you can do to use BNPL responsibly

There is nothing wrong with the idea of wanting to see your money in your bank account for longer. Especially for slightly bigger purchases, it may feel more comfortable to space out payments. However, using services like AfterPay can easily change your spending attitude.

If the initial price of your purchase was $400, but you split payments it might feel like you only spend $100. However, you set yourself up to pay an additional $100 for the next three weeks (or whatever period you choose) that you may not consider in your budget.
This can quickly add up and leave you with additional fees for late payments and a negative entry in your credit report.

• Factor BNPL into your budget. When planning your spending for the next month, include your BNPL payments into your budget as you would with any other spendings. If you already have payments lined up, block that amount in your budget to make sure you meet your payment obligations.
• Only have one BNPL account at a time. It’s very easy to lose track of your spending if you have to include multiple accounts in your budgeting. Multiple companies offer BNPL solutions but it’s best to set up one account and stick to it. It will make your life much easier.
• Set up auto-pay for your repayments. Most companies will directly debit the outstanding amount from your credit card on a certain date. If this is not the case, make sure that you either pre-schedule the payments or at least set yourself a calendar reminder. Missed payments may cause you to be charged late-fees and may even end with a bad entry in your credit report.
• Check your credit report frequently. Even though using BNPL shouldn’t affect your credit score, your provider may report late payments to your credit bureau. Mistakes happen, even if you make your payments on time. Therefore, you should keep an eye on your credit score and use a tool like Tippla to check it regularly.
• Be aware of any additional costs. Before you sign up for any service, you should check their costs and fees. Not all services are the same. Some may charge you monthly fees or setup costs for your account. Additionally, you will be charged extra fees for late payments.
• Link your account to your debit card instead of your credit card. You most likely chose BNPL because it is interest-free. However, if you link it to a credit card, you risk spending money that you don’t have. This could then cost you fees in interest that you were trying to avoid in the first place.

Is Buy Now Pay Later a safe way of spending?

It certainly is. Your BNPL provider will verify your identity to ensure your credit account is matched with the right person. However, you should be mindful to budget responsibly to protect yourself from overspending.

If you are concerned about potential damage to your credit score, you should make sure to check if a provider will perform a hard credit check that may be listed in your credit report. Checking your credit report frequently for any mistakes is a good idea either way.