The landscape of online shopping has transformed with the rise of ‘Buy Now, Pay Later’ (BNPL) services. These services offer consumers an alternative to make purchases by spreading payments rather than paying in full.
As of 2023, more than 19 million Brits (36%) use these services to shop. While Bnpl options can be a lifesaver for those looking to manage their finances, there’s a lingering question on many minds. “Does Buy Now Pay Later affect your Credit score?”
In this article, we’ll help you understand BNPL and how it can impact your credit score. This information should help you make informed financial decisions while looking after your credit health.
What is Buy Now, Pay Later?
Buy Now, Pay Later (BNPL) is a financial service that allows consumers to make purchases online or in-store and pay over a set period of time. Instead of paying upfront, BNPL enables shoppers to break their payments into smaller, often interest-free instalments.
Advantages of BNPL
BNPL services have resonated with the younger UK demographic. As of 2023, over half of UK millennials (55%!) have adopted this payment method. One primary reason is the growth of BNPL as a payment option offered by retailers.
For example, rather than facing a one-time £200 transaction, shoppers can choose to make four interest-free payments of £50 each. This breaks down larger purchases into bite-sized amounts, making paying for the purchase more manageable.
Credit Checks and BNPL
A common misconception is that all BNPL services conduct a traditional credit check. However, this isn’t always the case. In fact, in June 2022, over 54% of retailers mistakenly believed that BNPL companies execute a full credit check.
Some might only do soft checks, which don’t impact credit scores, while others might bypass the credit check process altogether.
To measure the possible impacts of BNPL on one’s financial health, knowing one’s credit score is essential. Knowing what constitutes a good credit score, how to check your credit score for free, and interpreting credit report insights can help consumers make informed decisions.
As per Experian, the average credit score in the UK is 797. With this it’s essential to approach services like BNPL with knowledge that helps you make better financial decisions.
How BNPL Services Can Affect Credit Scores?
Buy Now, Pay Later services, have changed online shopping, offering flexibility and convenience. But as with any financial tool, there are things to consider, especially when it comes to one’s credit health.
BNPL Providers and Credit Bureaus: A Varied Connection
Not all BNPL providers operate the same way when reporting to credit agencies. Some might not report at all unless there’s an issue, like a missed payment. It’s essential to check your credit score for free once a year. Also watch out for any entries related to BNPL.
The Ripple Effect of Missed Payments and Late Fees
While BNPL services can offer convenient payment structures, they aren’t entirely without strings. If a customer fails to honour the set instalment dates, it could have a negative impact. Missed payments can be reported to credit bureaus. This can tarnish one’s credit history.
Late fees can accumulate. This can make the debt harder to settle and further damage one’s credit standing.
The Trap of High Credit Utilisation Ratios
Credit utilisation is an indicator of how much a person is using their available credit.
For example, if someone has £1,000 of credit and uses £500, their utilisation is 50%. BNPL services can be tricky in this aspect. If someone frequently uses BNPL for many purchases, they might inadvertently hike up their credit utilisation.
It is suggested that maintaining credit utilization below 30% can help improve credit score. Excessive BNPL usage might cause this ratio to spike, which could negatively affect credit scores.
BNPL Transactions: How Do They Reflect in Your Credit Report?
It’s only natural to wonder how BNPL features in your credit report. Understanding this relationship can offer clarity.
Below is a table highlighting key aspects of BNPL transactions and how they might appear on your credit report:
| BNPL Transaction Aspect | How it Reflects in Credit Report |
| Initial Transaction | No immediate record shows on your report when the transaction occurs. |
| Payment Schedule | Providers will list the schedule or show it as an open account. |
| Missed Payments | Reported by providers; this can harm your credit score. |
| Completed Payments | If reported, it can boost credit history. |
| Account Closure (After Full Payment) | Appears as ‘settled’ or ‘closed’. |
How to Use BNPL Responsibly?
The convenience of BNPL can make it a tempting option for shoppers to use regularly. However, like all financial tools, responsible usage is the key. Benefiting without facing adverse consequences is important.
Here are some straightforward pointers to use BNPL responsibly:
- Always read the terms and conditions before opting for a BNPL service.
- Schedule reminders for due dates to avoid missed payments.
- Regularly perform a credit score check to monitor any changes.
- Prioritise clearing any outstanding payments before using BNPL for new transactions.
- Have a detailed look at your credit report
- Stay informed about regulations and changes in policies of credit providers. Especially with BNPL services coming under FCA scrutiny.
Alternatives to BNPL
Buy Now, Pay Later (BNPL) offers a convenient proposition, but it’s not the only option. Many alternatives are available. Knowing your financial situation and preferences is key.
Exploring these can help you choose the best method. Make sure you’re spending without compromising your credit score.
1. Choosing a 0% APR Credit Card
A 0% APR credit card offers access to credit with no interest for an initial period. This is usually offered over 6 to 21 months . It can be considered for things like big purchases. It allows a cushion period to pay back without interest costs. So long as it is repaid within the interest free period.
This approach can help improve credit score when used responsibly.
2. Choosing Cash-Back Rewards
Credit cards with cash-back rewards let you earn while you spend. These cards give back a percentage of your spending in the form of rewards or cash.
But you must regularly clear monthly balances. Steer clear of getting behind on commitments and enjoy the perks of cash-back.
3. The Classic Way of Cash or Debit Card
While there are many credit options available, using cash or debit card for transactions is the simplest. It ensures you spend within your means, removing the risk of building up debt.
If you stick to this method, you will not need to keep a constant eye on your credit report. You also need not worry about whether BNPL affects your credit score.
4. Stay Informed with Deal Alerts
Shopping for deals and discounts can help. Subscribing to deal alerts for discount offers can get you the best prices.
This can save money and reduce the need for credit, be it BNPL or credit cards. And savings can used to clear existing debts or boost savings.
5. Discovering PayPal’s BNPL Option
For those who like BNPL but want a renowned provider, PayPal offers Pay in 3 . Eligible UK buyers use it to split their payments for purchases. It ranges from £30 to £2,000 paid in three interest-free instalments.
Exploring various payment options and knowing how they affect credit score is crucial.
Conclusion
The key takeaway is to exercise caution. Be diligent when using BNPL services. While convenient for immediate needs, sometimes it may not be the most suitable.
Traditional loans, that are subject to rigorous credit checks and reported to credit reference agencies, offer a structured way to borrow and repay. They can positively impact your credit reports and payment history when managed responsibly.
Frequently Asked Questions
Is Buy Now pay later bad for your credit score?
Not necessarily. Credit reference agencies now include details of short-term BNPL transactions in your credit report. But this information is not currently factored into credit scores. This is a temporary situation while credit reference agencies and lenders analyse this new information and update their credit scoring systems.
For people with limited credit history, the inclusion of short term BNPL information on their credit record could help. Evidence of good payment history will help.
Does buy now pay later count as credit?
Yes, it’s a form of credit. But it may not involve the traditional credit checks you would encounter with a loan or credit card.
Does a 7 day late payment affect credit score?
Yes, late payments can negatively affect your credit score. Any late payment reported to credit reference agencies shows in your payment history.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
