Can buy now pay later shopping affect your credit score?

Buy now pay later can be a great way to pick up that gorgeous dress, hard-to-find pair of trainers – or even book a well-earned holiday. But it’s important to be disciplined when using these facilities. Because you don’t want to end up in a lot of debt or, worse, with a black mark on your credit report.

In 2014, Afterpay led the field when it introduced its buy now pay later model, an updated, digital version of layby. Since then, many other market entrants including zipPay, PayRight, Openpay and, more recently, Klarna have entered the market.

There are slight differences between each one. But in essence, they let you buy something and pay it down in a number of instalments. Four is the usual number for less expensive items – this is the Afterpay model. Some providers let you pay off more expensive items over a higher number of instalments. Others, like OpenPay, let you choose the number of instalments.

The basic difference between buy now pay later shopping and a credit card is you don’t pay interest on top of your purchases. Instead, you pay a set of fees. For instance, PayRight charges a one-off fee of up to $89.95 to set up your account, which is added to your balance. It also charges a monthly fee of $3.50 and a $2.95 payment processing fee every time you make a payment.

PayRight is just one example and other operators have lots of different fee structures. Some charge monthly fees and joining fees and most charge late fees. For instance, Afterpay charges a $10 fee if you miss a payment. It also locks down your account until you make the payment. This rule is part of its responsible lending policy. Afterpay and others will also send you a reminder if you’re late making a payment.

Also, remember if you pay with a credit card you might accrue interest on top of the fees you pay through one of these services. So be careful how you use these services because fees can add up really quickly. Before you know it, you can have hundreds or even thousands of dollars to pay off just because you’ve bought a new TV, fridge and some bedsheets.

Technology is your friend when it comes to managing your payments. For instance, Klarna’s app has a great feature that shows you when your next repayment is due, centralises your repayments and sends you a reminder two days before a repayment.

Registering with buy now pay later services can sometimes require a credit check which might affect your credit score. For instance, services such as PayRight notify you when they do a credit check. You’ll get an SMS when you apply to be a customer asking for your consent to do a credit check. Additionally, a record of a transaction may go on your credit report if you default on or are late with a payment. If you default, this information will stay on your credit report for five years.

Many other providers may also check your credit report before they allow you to use their service. Afterpay’s terms and conditions state it reserves the right to check your credit report.

There are differences between regular loans and buy now pay later shopping when it comes to your credit report. For instance, your credit report will show if you have always paid off your loans on time. But it won’t indicate if you have an unblemished record paying off your buy now pay later purchases.

Nevertheless, there can be serious consequences if you don’t meet your scheduled buy now pay later instalments and your credit report is impaired. It could mean a lender knocks you back for a loan down the track. Or you could end up paying a higher interest rate.

Buy now pay later shopping can work for you if you have a secure job and regular income. But you need to be disciplined about not accruing too much debt and paying your instalments on time.

Above all, avoid getting over your head in debt just because you’ve maxed out your buy now pay later account. Always spend responsibly because it’s not worth compromising your credit record and ability to take out a credit card or mortgage down the track.