In recent years, ‘buy now pay later’ (BNPL) has become an increasingly popular method for consumers looking to purchase goods via installments without resorting to credit cards. These services are often billed as a safer and more convenient  way for consumers to manage their spending, and their popularity has led them to become widely available.

But if you miss a payment or misunderstand the particular terms you’re agreeing to, BNPL has the potential to dent your credit score and impact your lending ability down the track.

Under Australian Law, while BNPL schemes are not credit facilities and will not show up on your Comprehensive Credit Reporting (CCR) file, companies offering these services do have the right to report individuals to credit reporting bureaus if you have missed several monthly repayments.

What is BNPL?

The BNPL market is growing exponentially. Valued at $43 billion, this sector has tripled over the previous two financial years, according to the Reserve Bank of Australia.

BNPL schemes allow consumers to buy goods and services from a retailer by only paying a fraction of the price at the time of the transaction and the rest of the payments in instalments. This convenient payment method offers interest-free payments to consumers and is currently attracting considerable attention. However, BNPL schemes pose the question to consumers and more specifically first-home buyers, ‘What impact does buy now pay later have on my credit score?’

The market leader of the BNPL market, Afterpay, alongside other BNPL providers, claim its platform is designed to assist retailers attract more customers and should not attract similar regulatory attention as credit cards or personal loans.

The CEO of Afterpay, Nick Molnar, said: “Afterpay has become a leader in the global ‘buy now pay later’ space. We have flipped the traditional credit model on its head to drive significant value to both merchants and consumers.”

However, if you miss payments, you could be in trouble.

From 1 March 2021, BNPL companies, such as Afterpay and ZipPay, signed a Code of Conduct to clearly define best practice for the BNPL market to ensure customers are protected. Whilst this is only the first step in regulating the market, BNPL companies are also subject to legislation, including the Privacy (Credit Reporting) Code 2014, the Australian Privacy Principles (APP) and other legislations where appropriate.

In the 2018-19 financial year, the total revenue from missed payments from all BNPL providers totalled over $43 million, a 38 per cent increase from the previous financial year. So, the answer to the question is – yes, BNPL transactions can negatively impact your credit score if you miss a payment and if this is a common occurrence, will impact your credit report overall.

Why is your credit score important?

Many people, especially younger consumers, have a general understanding of what a credit score is and that a bad credit score, or rating, can affect their ability to secure loans or lines of credit.

What they may not realise is that almost every transaction they make has the potential to impact their credit score – whether it is paying a utility bill late, carrying a lot of ‘contract debt’ by upgrading your phone every year on a plan, regularly overdrawing your bank account and using overdraft, or having multiple credit cards and only paying the minimum monthly fee.

All of these factors are taken into consideration to give a picture of your spending habits and determine whether you are a desirable candidate to lend money to.  So while it may not seem like a big deal if you pay your electricity bill a few days late, or you’ve signed up to a five year plan to pay off the latest iPhone, or regularly using BNPL services to pay for things, these actions may be chipping away at your credit rating which could cause issues when it comes to seeking a home loan down the track.

Improving your credit score

The first step is to go online and check your credit report. This is generally a free process and everyone is entitled to one get a credit report once a year. Ensure all your personal details and queries on your credit history are correct. However, beware of any credit repair companies that claim to improve your credit score. This is simply ineffective and a rip-off.

Here are some steps to help you improve your credit score and make yourself a more desireable loan candidate if you expect to be applying for a home loan in the near future.

1. Resist the lure of BNPL and other easy spending

To avoid additional scrutiny of your personal spending habits, it may be better to close your BNPL accounts and focus on only purchasing things you can pay for in full. Resist the urge to upgrade your phone unnecessarily so you can pay out your existing plan.

2. Limit the amount of credit applications

In the year leading up to your mortgage application, be cautious of applying for credit. It is advised to wait until after your loan has settled to then apply for credit and take advantage of interest-free loans.

3. Close any unused credit cards

If you have any unused credit cards, it is advisable to close them to increase your borrowing capacity. When assessing your loan application, a lender will often assume all credit limits are fully drawn and will count the minimum payment as an expense. This may be the difference between getting the loan or not.

4. Demonstrate stability in employment and residency

Staying in the same workplace and household for at least six months is key to obtaining a home loan. Banks like to see stability, and moving jobs or houses can compromise getting a loan approved.