Does Buy Now Pay Later affect your credit score?

Image by Bruce Mars

From Afterpay to Zip, Klarna and every Buy Now Pay Later (BNPL) company in between, it seems Aussie shoppers can't get enough of splitting up purchases. In fact, Mozo research has found that 5.8 million Australians have at least one Buy Now Pay Later account. 

But ever since BNPL hit Aussie shores, there's one question that still remains for almost all BNPL users: will it affect my credit score? 

One of the biggest reasons BNPL services have surged in popularity over the past few years is that it promises interest-free shopping with little to no fees.

So why would the average Aussie be worried about this service affecting their credit score if no interest is involved? Well, like most personal financial products, it's all in the details. 

To give you the inside scoop as to whether signing up to a Buy Now Pay Later platform could impact your credit health, we've compiled this handy guide to help you.

Is Buy Now Pay Later a type of credit?

To understand whether using Buy Now Pay Later could impact your credit score, it's important to first understand if the service is, in fact, a form of credit. On the surface, BNPL services are an interest-free way to do your everyday shopping. But if you think about the way they operate, they somewhat resemble the humble credit card.

For example, let's say you decided to purchase a pair of jeans via BNPL. When you check out, your selected BNPL provider will cover the total cost of the jeans, leaving you with the duty to pay back the BNPL company. Sounds familiar, right? 

From a legal standpoint, Buy Now Pay Later companies are not recognised as credit, as most are not regulated under the National Credit Act because of the way they operate. For instance, BNPL companies, like Afterpay do not charge their users a fee for their 'debt' like a credit card provider would. 

 But just because BNPL might not be legally recognised as credit, it doesn't mean there's no damage to your credit score.

So how can Buy Now Pay Later impact my credit score?

If you begin to accrue negative actions on your BNPL account, like defaulting on payments, many BNPL companies reserve the right to report these actions to credit reporting bureaus.

Another common way your BNPL spending could hurt your credit score is if you choose to link your credit card to your account and miss monthly repayments. Doing this often enough could lead to a negative mark on your credit report. 

It's also worth mentioning that if you're someone who doesn't always pay your balance off in full every month, you could be accruing interest on your BNPL purchases.

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

This will depend on the BNPL company you sign up for. Generally speaking, BNPL companies provide customers with a larger account limit to ensure customer credibility. 

Some BNPL companies that may perform a credit check or look into your credit score before approving your application are:

  • Payright 
  • Zip 
  • Humm 
  • Openpay
  • Klarna 
  • Latitude Pay 
  • Lay Buy

How is Buy Now Pay Later being regulated?

On 1 March 2021, BNPL companies, like Afterpay, Klarna and Zip signed a Code of Conduct. This Code was a world-first for this type of regulation, as it set out the best practice for BNPL's to ensure customers were protected. 

However, many experts say this Code is merely the first step. 

“These services are growing at a breathtaking rate and as this industry continues to grow, we will see increased debts and increased financial hardship,” said Financial Rights Legal Centre chief executive officer, Karen Cox. 

Other sections of the law BNPL companies are subject to are the Privacy Act 1988, the Australian Privacy Principles (APP) and the Privacy (Credit Reporting) Code 2014 wherever necessary.

What kind of credit score do I need to apply for a Buy Now Pay Later account?

Information around this is blurred, as there is no definitive number or score you need in order to be approved for a Buy Now Pay Later account. In this case, checking your credit score before submitting an application might not be a bad idea. 

If you come to find that your credit health could do with some improvement, it could be worth improving your credit score first to avoid being rejected. 

Ready to find the Buy Now Pay Later company that's right for your spending needs? Then head on over to our Buy Now Pay Later feature guide. If you're more interesting in crunching some numbers, check out our Buy Now Pay Later statistics.