Does Buy Now, Pay Later affect your credit score?

In the last few years, Buy Now, Pay Later has become a popular way for people to purchase items. Platforms like AfterPay, Zip, Humm and Klarna give individuals the convenience of purchasing that new outfit, airline tickets or tech gadget right now, allowing them to spread the payments over time – often without interest. 

Sounds too good to be true, right? Well, it can be, especially when it comes to your credit score. 

What is Buy Now, Pay Later? 

Basically, BNPL is a short-term loan where you can pay for your purchases over several instalments, instead of upfront. It’s super convenient, however, what many people aren’t aware of is that it’s still a form of credit. 

Here’s how it works:

1. No upfront payment: You make a purchase and pay it off over time.
2. No interest: Most BNPL services don’t charge interest, which can seem like a sweet deal.
3. Late fees: Miss a payment, and things get costly fast.

How can BNPL affect your credit score?

Your credit score won’t be affected just by having Buy Now, Pay Later, but there are a few things that can impact your credit score with BNPL:

1. Late or missed payments: If you miss a payment, BNPL services will report it to credit bureaus, which can cause your credit score to drop. Just like with credit cards or loans, your repayment history is a huge factor in your credit rating. So even if you’re only a few days late on a BNPL payment, it could show up on your report and stick around for two years!
   
2. Multiple BNPL accounts: It’s easy to open accounts with multiple BNPL providers—AfterPay here, Zip there, and Klarna for another splurge. However, juggling payments across multiple platforms can quickly get tricky, increasing the risk of missing a payment. Plus, having several BNPL accounts might make lenders question your ability to manage your finances, which can lead to trouble if you apply for bigger loans in the future (hello, mortgage).
3. Linked credit cards: Some people link their BNPL accounts to a credit card to make payments. But if you max out your credit card or fail to pay it off on time, you’ve got double the problem—late payments on both your credit card and your BNPL account. This can drag your credit score down even further.

Are BNPL Services different from credit cards?

At first, BNPL may seem a better alternative than credit cards, after all, who wants to deal with those interest rates? However, there are a few key differences: 

• Ease of use: BNPL services don’t require a formal credit check, making them more accessible than credit cards.
• No credit score boost: Even if you make every BNPL payment on time, it won’t improve your credit score, unlike responsible credit card usage, which can boost your rating.
• Fees: BNPL might not charge interest, but they often have late fees, which can add up fast – AfterPay, for example, earns a significant portion of its revenue from late fees.

Tips for using BNPL responsibly

If you love using BNPL but want to protect your credit score, here are a few simple strategies:

1. Stick to one BNPL provider
   Managing multiple accounts increases the risk of forgetting a payment. Stick to one provider so you can keep better track of your spending.
2. Set a spending limit
   It’s easy to get carried away with BNPL. Before you know it, those $50 purchases add up! Create a budget that factors in your BNPL payments so you don’t end up spending more than you can afford.
3. Use direct debit
   Set up a direct debit linked to your debit card (not your credit card) to ensure your payments are made on time. This reduces the risk of missed payments and keeps things simple.
4. Check your credit score
   Regularly monitoring your credit score is a great way to catch any issues early. If you notice something off, contact your credit reporting agency to correct it.

Buy Now, Pay Later – Be careful

BNPL services can be convenient, but they can also affect your credit score if you’re not careful. Late payments, over-reliance on multiple BNPL accounts, and linking your payments to a credit card can all cause issues down the line. By sticking to a budget, setting up direct debits, and keeping your BNPL usage in check, you can enjoy the perks without hurting your credit score.

If you’re concerned about how BNPL may have impacted your credit or you’re struggling with managing your credit score, Fix My Credit is here to help. We can provide advice and support to get your credit score back on track so that your future financial goals remain achievable.

Let us help you fix your credit today!