Check your credit score today

See your credit score and report. It’s free, forever.

Check your score

Can Buy Now Pay Later affect my credit score?

With Buy Now Pay Later (BNPL) options among us, it may seem like a good time to snap up a few deals. However, using BNPL can actually lower your credit score.

08 September 2022Stephen Smyth 5 min read
Buy Now, Pay Later refers to a range of services that allow a consumer to purchase a product or service and then pay for it in installments over a period of time, rather than paying the full cost upfront. These services, such as AfterPay, Zip, Humm and Klarna, have grown in popularity over the past few years, especially because they don’t charge interest if you make the payments on time.

Check your credit score today

See your credit score and report. It’s free, forever.

Check your score

Buy Now, Pay Later refers to a range of services that allow a consumer to purchase a product or service and then pay for it in installments over a period of time, rather than paying the full cost upfront. These services, such as AfterPay, Zip, Humm and Klarna, have grown in popularity over the past few years, especially because they don’t charge interest if you make the payments on time.

Late or missed payments can give you a lower credit score

Every missed or late payment that you make will be reflected in your credit report. Using Buy Now Pay Later services can make it more difficult to manage your repayment schedule, particularly if you’ve opened multiple accounts. Your credit score is calculated largely based on your repayment history for loans or lines of credit, so any late payments will have an impact. Many BNPL services also provide you with a credit limit, even though that’s not always explicitly clear, and this can also negatively affect your credit score.

The Credit Bureaus in Australia - Equifax, Experian and Illion – are increasingly updating their scores and credit reporting to reflect whether you have multiple Buy Now Pay Later accounts and have made payments on time. If you cannot manage payments, or open too many accounts, it can affect your credit score negatively just like a regular loan.

Lenders might be concerned about your ability to manage credit if you have multiple Buy Now Pay Later accounts.

Your credit score takes into account your track record of income and expenses. If you frequently use Buy Now Pay Later services this can affect your credit score because you’ll be calculated as less likely to be able to pay back a loan than someone who has never had to use Buy Now Pay Later accounts. This also provides evidence of your spending habits and so may make it less likely for a lender to approve you for a loan. In some instances, they might decline you for credit if you have too many open BNPL accounts.

Using Buy Now Pay Later services might leave you with more debt.

If you don’t budget correctly and end up purchasing more than you can afford, you might accidentally overdraw your account and end up with credit card debt. Not only would this be considered a liability by lenders, it would most likely negatively impact your credit score, further decreasing your chances of securing a loan. Even if you make all your repayments, some BNPL services report larger loans to credit reporting bureaus and this could affect your credit score. Some Buy Now Pay Later services also perform a credit check when you sign up for an account with them and this has the potential to affect your credit score.

Your credit score is calculated based on your credit history and your ability to manage your finances. It is a summary of of a variety of factors, including:

  • Your repayments history for loans or lines of credit
  • How much you have borrowed in the past and the frequency of your credit applications or loans
  • Evidence of how often you have missed or made late repayments
  • Any credit limits that you currently have
  • Any bankruptcies or defaults in your name

Using Buy Now Pay Later services has the potential to impact your good credit history, regardless of how diligent you are when you use them. If you don’t budget appropriately or you forget to put money in your account for each scheduled repayment then it will have a more negative impact.

Buy Now Pay Later services are quick and easy to use

BNPL services are not considered credit providers and so do not have an application process like credit cards do. The approval process for services like AfterPay is extremely easy - if you wish to use a BNPL service, all you have to do is create an account and complete the purchase.

This is both a positive and negative attribute, because it is faster and offers more flexibility to customers, but it may also encourage those without a steady income to spend money that they can’t pay back. It also means that the user has instant access to funds, whereas credit card applications take longer to process. Most BNPL services don’t perform formal credit checks or any form of income assessment, so people are able to keep spending and potentially accumulate debt that they can’t repay.

Using a credit card offers more benefits

One of the main reasons why credit cards appeal to people is because they offer benefits like frequent flyer miles, access to airport lounges and travel insurance when used frequently at certain merchants. Additionally, using a credit card responsibly can help you improve your credit score, but no matter how responsible you are with your BNPL account it is not likely to increase your credit score.

Credit cards are also accepted by millions of merchants and service providers across the globe. While BNPL services are now accepted at thousands of locations, there are many places that don’t accept them, whereas you might find it a challenge to find somewhere (especially an online retailer) that doesn’t accept a credit card.

Buy Now Pay Later services don't charge interest, but do they charge late fees

One of the most appealing features of Buy Now Pay Later services is that they don’t charge interest - the flexible payment schedule is essentially free. Credit cards charge an average interest rate of 17% and often an annual fee, so it makes sense that BNPLs would seem like a better option.

However, BNPL services do charge late fees for missed payments and these can really add up. AfterPay earns almost 25% of its income from late fees alone, which gives you an indication of just how often people miss their payments. Some services, such as ZipPay, will also require you to pay a fee if you have a balance owing at the end of each month.

If you want to use Buy Now Pay Later services but are worried about getting in over your head, there are a few strategies you can use to stay on track. Firstly, one of the best ways to stay on top of your scheduled payments is to only use one account at a time. Keeping track of multiple purchases across multiple accounts can definitely make things messy. You should also write your payment dates on a calendar or diary to make sure you have money in your account at the time.

Stick to a limit for your spending, and make a budget that includes all of your usual bills as well as necessary expenses like food and groceries. It’s easy to overspend when you’re using BNPL services so this will help you avoid biting off more than you can chew.

You should also link your BNPL accounts to a debit card instead of a credit card if you have one, so that you’re using your own money and not being charged interest. Doing this can also help you avoid overdrawn fees.

Before you sign up to a BNPL service, you should read the T&C’s to check how they use your personal information and see what kind of extra fees you might end up paying. The table below lists this information for each of the most popular BNPL services in Australia.

BNPL Platform

Do they run a credit check?

Are there any monthly fees?

AfterPay

Afterpay does not run credit checks on applicants. However, they reserve the right to run credit checks and report activity to credit bureaus at their discretion.

Afterpay does not charge monthly fees, only late fees.

Humm

Humm performs a credit check when you apply for purchases larger than $2000.

Humm charges a $8 monthly fee for all ‘Big things’ purchases and ‘Little things’ purchases if you choose to repay over 10 fortnights.

Klarna

Klarna does not perform a credit check when you sign up, however Klarna has stated that “we may report information about your order to credit reporting agencies”.

Klarna does not charge monthly fees, but they do charge late fees ranging from $2.50 - $15.

Affirm

Affirm performs a soft credit check of an applicants’ credit history, which does not directly impact your credit score. This also won’t show up on your credit report.

There are no monthly fees to pay when using Affirm. Instead you will be expected to pay the interest on the loan you take out.

Zippay

Zip performs a credit check when you apply for one of its products.

Zip charges a $7.95 monthly account fee. However, Zippay waives this fee if you can pay your closing balance in full.

LatitudePay

LatitudePay will assess if you have a healthy credit score by doing a ‘soft’ credit check, which does not directly impact your credit score. This also won’t show up on your credit report.

There are no monthly or hidden fees when using LatitudePay. However, there are late fees of $10 for every payment missed.

StepPay

CommBank undertakes ‘standard credit checks’ when eligible customers apply for StepPay.

StepPay has a $0 monthly fee, with no interest, and no international transaction fees.

Using Buy Now Pay Later services can affect your credit score, even if you never miss a payment. The best way to avoid this is to use one account at a time and limit the amount of payments that you need to keep track of. If you’re worried about how these services might’ve affected your credit rating, you can get a free credit score check.


Stephen Smyth Image

Written by Stephen Smyth

Head of International Expansion

Stephen Smyth has worked in financial services since 1999, specialising in consumer credit. He has worked in banks and consumer credit companies in the United Kingdom, France, Spain, India, South African and has lived in Australia since 2013. He believes that people around the world can benefit from services liked ClearScore to make finances clearer, easier to understand and to find better deals to save money.