What you should know about Buy Now, Pay Later services & your credit score

Last updated: 17 November 2021

In Australia, Buy Now, Pay Later providers such as Afterpay, Zip Pay, Humm, PayPal Pay and Klarna are hugely popular. These types of Buy Now, Pay Later services enable shoppers to buy almost anything from clothes to solar panels to groceries, takeaway and more!

In November 2020, ASIC reported[1] that there were more than 6.1 million open Buy Now, Pay Later accounts as at June 2019, representing up to 30% of the Australian adult population.

More recently, in the latest Savvy Survey conducted in October/ November 2021  – 74% of respondents said they had used Buy Now, Pay Later as a payment method in the last 12 months.[2]

Despite its popularity, there is still some confusion about Buy Now Pay Later, and the impact this type of payment service can have on your credit score.

What is Buy Now, Pay Later?

Buy Now, Pay Later arrangement allows you to order or purchase a product or service immediately and delay payment. Payment instalment options can range over several weeks or, with some service providers, over a longer period of time. One of the key aspects of Buy Now, Pay Later is ‘no interest’ if payments are made on time. However, there are fees and charges for late or missed payments.

In general, it’s easy and instant for most people to use Buy Now, Pay Later.

Could Buy Now, Pay Later affect my credit score?

Yes, Buy Now, Pay Later could affect your credit score if the provider performs a credit check when you sign up or if you miss your payments. As Buy Now, Pay Later is linked to your debit or credit card if repayments are not managed carefully, this may mean being overdrawn or over your credit card limit which could adversely affect your credit score. Not all Buy Now, Pay Later providers check your ability to make repayments, this means you could end up taking on more credit than you can afford.  If you are already in debt, further debt could have an impact on your credit score which could make borrowing credit more difficult in the future.

However, if you are hoping that making regular and on time repayments of your Buy Now, Pay Later accounts will boost your credit score – think again. Read on!

What information is added to my credit file if I’m using a Buy Now, Pay Later service?

Unlike the traditional forms of credit, not all of these services conduct a credit check when you apply to become a customer. And because these aren’t currently considered as credit products, open accounts and your repayment history won’t go towards helping you build up a good credit history either.

However, in the event where you miss a payment, most of these providers can report any negative activity recorded on your Buy Now, Pay Later account (including late payments, missed payments, defaults or serious credit infringements, etc.) to credit reporting bodies and of course they’ll charge late fees too.

How long the black mark will stay on your credit report depends on the type of negative event – you can find out the duration here.

How could I use Buy Now, Pay Later services responsibly?

  • Limit the number of Buy Now, Pay Later accounts

Opening several  Buy Now, Pay Later accounts could result in you losing track on how much you have spent and owe. If you have other finances due at the same time as your Buy Now, Pay Later accounts, you could have trouble making all the repayments.

  • Don’t bite off more than you can chew

It’s always a good idea to set a budget and stick to it. Before you make any purchases through these types of services, consider the total of what you intend to spend against your budget. Knowing how much essentials like rent or mortgage, groceries, internet and other non-negotiables add up to, can help you calculate what level of Buy No, Pay Later debt you can afford to take on.

  • Link to a debit card, not a credit card

If you are planning to sign up to a Buy Now, Pay Later service, make sure you link your account to your debit card instead of your credit card to make your repayments. Putting  transactions on a credit card could easily build up on your monthly credit card balance and mount into further debt from the interest.

  • Check your funds regularly & set up payment reminders

Buy Now, Pay Later services automatically deduct the balance from your preferred debit card or credit card, so make sure you have sufficient funds in there before the due date to avoid late fees. Use notifications to track the number of purchases you’ve made and enter the due dates in your calendar so that you can work these payments into your budget.

  • Read the T&Cs before you apply

While some Buy Now, Pay Later services are an alternative to paying upfront, layby or using a credit card, you should always read the fine print to be aware of the potential risks associated and how your personal information is being handled by these platforms.

If you haven’t checked your credit score or reviewed your credit file, don’t worry, you can sign up for free at Credit Savvy today!

Get my credit score now

[1] Buy now pay later: An industry update Report 672 | November 2020

[2] 76% (n4916) have used Buy Now, Pay Later at least once in the last 12 months. The total number of valid respondents to The Savvy Survey was 6560.