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Zip Pay and Your Credit Score | What You Need to Know

Learn everything you need to know about one of the most popular BNPL brands, Zip.

Zip Pay and your credit score
Zip Pay

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Zip is 2nd most popular Buy Now Pay Later brand in Australia behind Afterpay and offers a variety of interest-free ways to make purchases.

Using Buy Now Pay Later services can be a positive way to manage your finances but also carries risks. It is possible to negatively impact your credit score and your ability to borrow in the future so it makes sense to plan in advance how to use these products responsibly.

Zip could affect your credit score in three ways:

First, Zip performs a credit check when you apply for one of its products. This leaves an enquiry on your credit record. The impact of this can be to lower to your credit score, especially if you have applied for multiple credit products recently. It is unlikely that this would be a significant drop and your credit score is likely to recover within months.

My personal experience is that I’ve seen my credit score drop 20-30 points if I apply for a few credit products in a short space of time. This is not enough to damage my ability to access credit in most circumstances. However, it is important to be aware that if your credit score drops below certain threshold scores e.g. 700 – and these vary by lender – you might no longer see their offers.

Second, if you begin to miss payments or even default on purchases that you have made with Zip you could see a much more severe drop in your credit score. There’s also a related risk that if you spend too much on Buy Now Pay Later; you might struggle to keep up on other payments. This is a much bigger problem. Defaulting on a loan could mean a drop in your credit score of several hundred points and massively reduce the available credit cards and loans for you. Even missed payments can cause a significant drop in your score temporarily but can recover much more quickly.

Finally, the positive news is that having some evidence of credit activity can be a positive influence on your credit score. Showing you can take out credit and manage it well is better than never taking out credit from a credit score perspective. It shows that you are responsible in managing your finances. This might help you in the future get a bigger loan for a car, a holiday or a new home.

Zip Pay is a Buy Now Pay Later product allowing you to make purchases up to $1500.

You can use Zip Pay at check out when you buy things online. Zip is accepted at a range of major retailers (see below). There is no interest payable – although there are fees - and you can repay weekly, fortnightly or monthly.

Zip also comes with an App where you can open an electronic Visa card that can be added to your Apple wallet or Google Pay so that you can shop everywhere Visa is accepted. This is a significant bonus compared to many Buy Now Pay Later products that only allow you to buy things at specific stores where they have a partnership.

The Zip app also comes with rewards and cashback to encourage you to engage more frequently and spend more.

There are fees associated with Zip Pay – currently a $7.95 monthly account fee. This is waived if you pay your statement closing balance in full, just like with a credit card. If you cannot make a payment when it is due, you will be charged a $5 fee.

Zip Pay is a Buy Now Pay Later product like Afterpay and others in that it enables you to make a purchase, at Bunnings for example, and pay back this purchase over time. This is great benefit if you do not have enough money at the time to cover the whole purchase.

Larry Diamond, the CEO and founder of Zip, proclaims the purpose of Zip to “Create a world where people can live fearlessly today, knowing they’re in control of tomorrow”. In practical terms this means you can buy your hedge trimmer today without worrying about whether you can afford it today and pay back the amount over a reasonable time. On a more serious note, many people desperately need credit because of loss of employment, sickness or other emergency. Buy Now Pay Later and similar products such as credit cards provide a critical service to these people who may need to repair a car, replace a broken appliance or pay medical bills.

Whereas Afterpay is known for a model based around 4 equal payments spread 2 weeks apart, Zip comes with more flexibility and options.

When you sign up to the Zip you will be asked how you want to pay. The default is set when you sign up to only pay the minimum monthly repayment. If you select this option it means you will be charged the $7.95 monthly fee if you have an outstanding balance.

The $7.95 monthly fee is quite low to borrow money in absolute terms. But it could work out to relatively expensive when considered as a percentage of what you borrow. If you decided to purchase something for $200 and pay only the minimum, you would be liable for a fee of $7.95. This is not an interest charge but would be equivalent to an interest rate of around 4% per month which is more than double what you would pay on most credit cards. As the fee is fixed the good news is that this is capped if you have a higher balance.

Even better, Zip will not charge you the monthly fee if you pay off your balance in full each month. This works exactly like a credit card, where no interest is payable if you pay your balance in full.

In addition to flexible payments, Zip has a range of methods to pay. You can use a digital Visa card and add it to your Apple wallet or Google Pay account. You can also make payments direct with the App.

Zip is not always free. Zip pay is interest free like some credit cards that only charge a monthly fee or all credit cards that are interest free if you pay back your balance in full at your due date.

Zip charges a range of fees and makes significant money from charging retailers when you use Zip Pay to check out.

According to Zip’s annual reports, Zip makes $60 per year per customer. Some of this comes from the $7.95 monthly fee that you pay Zip if your balance is not paid in full. There are also $5 late fees and fees charged to merchants.

The great news is that Zip Pay can be free if you pay off your statement balance in full. To do this, you need to change your automated payment option in the app by logging in and then:

  1. Select the "HOME" tab located at the bottom of the app screen.
  2. Select your account.
  3. Select "Manage" located below your next scheduled payment.
  4. Select the preferred schedule type (Custom, Smart schedule or Fee waiver schedule).
  5. Select "Confirm".

Zip Pay is accepted by a lot of the major Australian retailers. A full list can be found here.

Some of the major ones include:

  • Bunnings
  • Target
  • Big W
  • Kmart
  • Amazon
  • Officeworks
  • Harvey Norman (online only)
  • The Good Guys
  • Bing lee
  • Cotton On
  • Rebel
  • Winnings Appliances
  • Pizza Hut

Zip does do a credit check. This will leave an enquiry on your credit report.

Australia now operates a Comprehensive Credit Reporting system which means that your payment history can also be tracked by credit bureau such as Equifax, Experian and Illion. It is important to make payments on time.

Zip’s terms and conditions also lists that it will consider you to be in default if you do not pay your minimum repayment amount by the due date. It reserves the right to use solictor’s to recover any unpaid balance and to charge your debit card with the legal and other enforcement costs.

At ClearScore, we allow you to check your credit score and report for free and help you monitor and improve your score. Sign up for your free credit score here.

Using Zip Pay can improve your credit score.

Credit bureau like Experian, Equifax and Illion create credit scores to summarise how well you have managed credit in the past. A high score means you have managed credit well.

If you borrow money from credit bureau and manage it well by making payments on time, you are demonstrating you can responsibly manage credit. This can improve your score over time.

Many Buy Now Pay Later companies make a big deal about how they are so much better than credit cards with their ‘sky high’ interest rates.

In practical terms the products are not much different. For example both credit cards and Zip Pay both allow you to:

  • Buy something today but pay it back later
  • Have interest free periods if you pay your balance on time
  • Can be used at a variety of stores
  • Will negatively impact your credit score if you don’t pay on time

The cost of credit is not as different as is made out. Zip Pay claims to be ‘interest free’ but so is a credit card if you pay in full. It’s really worth considering the total cost of credit including regular monthly fees and interest charges.

The interest rate on a credit card might be between 1 and 1.5% per month. So if you have a balance of $200 you pay between $2 and $3 in interest charges per month. If you use Zip Pay and have an outstanding balance of $200 you would pay $7.95 in fees. In this case Zip is rather more expensive than a credit card! It all depends on how much you borrow and how long you borrow for. If you borrowed $1000 you would pay $10-15 in interest on a card but still only $7.95 on Zip. Both credit cards and Buy Now Pay Later are very flexible and reasonably priced forms of credit if you use them and pay down your balances in a few weeks or months.

Traditionally credit cards have been much more flexible than Zip because Zip was limited to only being used at retailers that had a relationship with Zip. Because of this in our recent study, we found 86% of Zip users had more than one Buy Now Pay Later account to be able to buy now and pay later in other stores.

Zip has become more like a credit card over time with the introduction of its electronic Visa card which now means you can use the product in all stores where Visa is accepted. BNPL and credit cards seem to be converging as many credit card companies are now allowing you to pay off purchases in specific instalments like a Buy Now Pay Later product.

The big benefit of Zip pay though is that it is not regulated like a credit card. This means it does not have the same strict requirements on responsible lending. In practical terms this means that you are much more likely to be approved for Zip than a credit card.

There are lots of alternatives to Zip. Zip itself has a Zip Money product for higher credit limits. There are also many other Buy Now Pay Later companies. The major ones in Australia in order of size are

  • Afterpay
  • Humm
  • Openpay
  • Latitude Pay

See them in more detail below.

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.

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.


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.