Nell Matzen - 29 Sep, 2021

Does ‘Buy Now Pay Later’ affect your credit score?

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Afterpay, Zip, Bundll, Klarna – the list of emerging Buy Now Pay Later (BNPL) providers is growing. This modern-day version of layby may seem too good to be true – because, in some instances, it is. 

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What is Buy Now Pay Later?

BNPL allows shoppers to make an online or in-store purchase by paying off the amount in interest-free instalments. Unlike layby, shoppers can receive their items at the beginning of the process instead of when the full amount has been paid. Another significant difference between the two services is layby repayments are owed to the store, whereas BNPL loans are paid to the service provider.

Since BNPL purchases are small lines of credit, you need to be approved just like any other credit product. Once approved, you will be given the details of your agreement, including the maximum amount you can borrow and a repayment schedule. You will then be able to link a nominated bank account or credit card to your account, from which your repayments will be automatically withdrawn at the agreed-upon intervals. 

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So how can a Buy Now Pay Later loan impact your credit score?

Just like a credit card, BNPL interest-free repayments are restricted to a specific time frame, and depending on your provider, any late repayments will then begin to accrue interest or late fees. This is where you need to be mindful of tracking and managing your BNPL payments.

In addition, if you start to default on your repayments, your BNPL provider has the right to report you to a credit reporting bureau. Linking your credit card to your account is another path to financial strife, as missing your monthly repayments could also lead to black marks on your credit score. 

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Is there a credit check when I apply for a Buy Now Pay Later loan?

Whether you need to pass a credit check to be approved for a BNPL loan will depend on the provider. For example, Afterpay, Australia’s largest BNPL loan provider, doesn’t perform credit checks, but Zip, Australia’s second-largest provider, does. Unfortunately, as with any line of credit, if you are rejected it may affect your credit rating. However, some providers conduct a semi-hard credit check, which won’t impact your credit score. It’s vital to comb through the fine print before signing on the dotted line as practices vary with each provider. 

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How is Buy Now Pay Later regulated? 

Due to the way BNPL providers operate, they are not legally recognised as credit providers and are not regulated under the National Credit Act, which helps to protect consumers against predatory lending. Thankfully, all BNPL providers operating in Australia have signed a code of conduct, which came into effect in March 2021. The code outlines minimum conduct standards, age restrictions, and guidelines surrounding late fees and dealing with customers experiencing financial hardship

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However, as the companies continue to grow, more regulations will need to be introduced to protect customers. Grant Halverson, managing director of financial services consultancy McLean and Roche said that the current lack of regulation in the industry is getting Australians into economic strife. 

“If you don’t get into financial trouble with them then some of them are possibly ok. But if you do, you pay rapacious late fees. At the same time, they are churning through young people, particularly young women. My real concern is those that get stuck with bad debts and default are going to have their credit histories destroyed and aren’t going to be able to get credit anywhere for seven years,” he said. 

Words by Nell Matzen 

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We’re committed to making your home loan journey go smoothly! Our eChoice brokers can help get you a credit report to see if your Buy Now Pay Later expenses will affect your application and discuss any unnecessary debts that might jeopardise your chances of a home loan approval. 

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