Melanie Hearse - 3 Jul, 2020

Do Zip Pay and Afterpay affect your credit score?

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Referred to as interest-free payment providers, Zip Pay and Afterpay are not classed as credit cards or loans, but can they affect your chances of mortgage approval?

Offering a “Shop now, pay later, interest-free” lifestyle, Afterpay and Zip Pay  – and other interest-free payment providers (IFPP) – offer the benefits of layby with the bonus of taking the goods or services home the same day.

However, Anthony Lieu from Legal Vision says this can translate into making purchases you otherwise may not, and entering into a contract to make payments you can’t afford, which may mean damaging your credit rating and your chance of securing a mortgage if you fail to make payments.

How do Zip Pay and Afterpay work?

Essentially, you can purchase goods or services and receive them instantly, then pay the account off over four fortnightly instalments. IFPPs don’t charge sign-up fees, and there are no interest charges.

As soon as the transaction goes through, your contract with the retailer is complete – Lieu explains they are paid in full by Afterpay or Zip Pay at the time of the transaction, and your payment contract is now entirely between you and your IFPP.

Zip Pay offers three different credit limits: $350, $500 and $1,000, while Afterpay has a limit of $500 for debit card purchases (where you use your debit card to sign up) and an account opened with a credit card will be assessed based on your limit and credit history.

zip pay and afterpay

To apply, you can log onto their website and fill out an online form. You’ll need to allow them to look at your Paypal, social media or bank account to verify your identity (via Facebook or Paypal) to make sure you are who you say you are. Subject to approval, sign-up takes only seconds, after which you can complete your purchase and pay for it later.

Some online stores will allow you to sign up on the spot and then at the checkout, you can select Zip Pay or Afterpay for payment method and answer a few quick questions. Once you’ve been approved, you can continue to use your account anywhere that accepts the payment platforms.

You can set up your repayments to fall monthly, fortnightly or weekly at whatever amount suits (provided this is greater than the monthly minimum), which is taken automatically via direct debit. You can make additional payments whenever you like via card or BPAY, though your scheduled payment will still be processed even if you make an additional payment outside of schedule.

Which company affects your credit score?

Some of the IFPPs can affect your credit score and it is good to know which one may ruin your chances at a home loan because of it.

This table provided below from Finder.Com explains what happens with your credit score and what their terms and conditions say.

The risks of Zip Pay and Afterpay

While there are benefits to using IFPP, it is not risk free. For starters, if you don’t make your payments, their terms and conditions usually state that if you fail to pay an instalment – which Lieu points out can easily happen if a direct debit fails due to insufficient funds or your credit card expiring – then you will most likely be charged a late fee of around $10. If the payment then fails again in a week, you’ll be charged again.

And it does happen – Lieu says a large portion of Afterpay’s revenue is from collecting late payment fees (in 2018, late fees were reported as 24% of their income).

If you do accrue a debt, he says IFPP reserve the right to refer the debt to debt collectors. This is where your ability to secure a mortgage may be affected.

“Although not a traditional form of credit, their terms specify that they reserve the right to conduct a credit history check. And if you’ve failed to make repayments, this may well be reported to a credit reporting agency, such as Veda, dropping your credit score,” Lieu says.

Credit history checks are a key contributor to whether or not you qualify for a mortgage and any black mark against paying off a debt is not going to be helpful. You may think it’s a low amount, but it’s also a red flag that you’re willing to default on a payment, which lenders take very seriously.

So when it comes to keeping your credit rating – and lendability – healthy, remember that the onus is really on you to work out if you can afford repayments, or else you run a very real risk of damaging your credit rating.

Related Text: ASIC’s new responsible lending guidelines aim to provide clarity on credit

Why is Afterpay under-fire from the RBA?

The RBA has brought Afterpay into the spotlight, with their recent Payments System Board annual report questioning Afterpay’s “no-surcharge” policy.

Currently, merchants who use Afterpay are not able to pass the surcharge for the service onto customers. This is potentially unfair to merchants, with critics saying it means Afterpay cut into their profits.

According to the RBA, if this is to change, there would need to be legislation and/or policy changes.

“It is our understanding that legislative and/or policy change would be required for the “Buy Now Pay Later” sector to be brought under specific payment system regulation,” said the RBA in a statement.

This comes after a report last year where ASIC recommended law reform to “buy now, pay later” sector.

In a statement, Afterpay said they were not currently under any formal investigation from the RBA and that they are “welcome the opportunity to engage with the RBA as part of its broad-based, periodic review of the payments industry next year.”

Words by Melanie Hearse.

Trying to whip your credit rating into shape so you can buy your first home? Speak to an eChoice mortgage broker to help you get that all-important pre-approval sorted, so you can submit your offer with confidence. We have access to hundreds of products, so we’ll find you a competitive rate.

This article was originally published on October 22 2019.

Updated: July 3 2020.

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